By Mike Jones
NZD
The NZD/USD has failed to benefit from a more positive tone overnight, laying low in a 0.8270-0.8320 range.
Hints the global manufacturing sector may be starting to stabilise after its weak run were greeted with open arms overnight. A bunch of less gloomy than expected global PMIs bolstered financial market sentiment. The US ISM survey even squeaked into expansionary territory.
Still, the normally pro-cyclical NZD failed to show any lasting response to the news. The NZD/USD briefly tested 0.8320 before slipping back below 0.8300.
Some might interpret this performance as a sign the NZD uptrend is running out of steam. However, we suspect the currency is simply pausing for breath ahead of potentially more important events later in the week. A re-check of the performance tables reveals the NZD is still easily the strongest performing currency over the past week.
The recent turn higher in NZ commodity prices has been a key fundamental driver behind the NZ dollar’s outperformance. World prices are currently around 8% above their May lows.
Lower US dairy supplies and steady global growth expectations should support additional gains in future, bolstering fundamental support for the NZD.
For today’s ANZ commodity price index, we’re looking for around a 3% lift in world prices. Tomorrow morning’s GDT dairy auction should also show prices building upon recent gains.
However, this afternoon’s RBA meeting (5:30pm NZT) will be the real show stopper. Market pricing is decidedly dovish, being consistent with a roughly 66% chance of a 25bps cut.
Given this, the AUD and NZD look more susceptible to a spike higher (with the NZD/USD perhaps back to 0.8350) should the RBA fail to deliver (and presuming we don’t get a very dovish post-meeting statement).
A failure to act by the RBA would also see the NZD/AUD check some of its recent gains. However, we’d view this outcome as more of a healthy correction rather than a definitive change in the trend.
Indeed, we expect relative commodity prices and interest rates to continue to favour the NZD over the AUD over the coming 3-6 months.
Our NZD/AUD valuation model shows short-term ‘fundamentals’ are tilted in favour of further NZD/AUD appreciation. The model currently suggests a “fair-value” range of 0.7950-0.8150.
So even after September’s near 3% climb, the cross is not fundamentally expensive. Our year-end NZD/AUD forecast remains 0.8200.
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Majors
Financial markets have started the fourth quarter in a more optimistic frame of mind. This thanks a batch of less gloomy than expected global PMIs.
Global equity markets are rallying, commodity prices are higher, and the ‘safe-haven’ USD is under pressure. The EUR has outperformed, but this looks to be more positioning related than anything fundamental.
European PMIs were far from a picture of health, but investors took heart from the fact that at least they didn’t get any worse. The aggregate EU index ticked up from 46.0 to 46.1 (46.0 expected), thanks to better French and German readings.
In the wake of the data, European equity markets headed higher, and the EUR/USD climbed from below 1.2850 to above 1.2900.
Press speculation that Greece could be close to receiving its €31.5b aid tranche was also positive for European sentiment.
And, following an encouraging US ISM reading (51.5 vs. 49.7 expected – the first reading above 50.0 in 4 months), investors began to embrace ‘risk’ more broadly.
The pro-risk AUD and NZD briefly tested levels close to last week’s highs, but were unable to sustain these gains.
In fact, most of the major currencies ended the night pretty much mid-range. This likely reflects investor caution ahead of a packed schedule of events over the remainder of the week.
Friday’s US non-farm payrolls, as always, will likely garner the most attention (a 115k jobs gain is expected). But there is also swag of central bank meetings due, starting with the RBA this afternoon.
Short-term support for the EUR/USD is expected at the 1.2824 200-day moving average. Initial resistance will be found on bounces toward 1.2950.
Other news:
*Fed chairman Bernanke reiterates pledge to maintain an accommodative policy stance through to 2015, but notes this doesn’t mean the US economy will be weak until then.
*Moody's says Spain's bank recapitalisation plan is ‘credit positive’ but warns that it may yet be insufficient.
*The Japanese Tankan was a little weaker than expected. The headline index fell to -3 in September, versus -1 in June.
*UK September manufacturing PMI showed activity deteriorating at a faster pace than August (48.4 vs. 49.0 expected).
Event Calendar: 2 October: AU PMI; NZ ANZ commodity prices; AU RBA cash decision; UK house prices; AU RBA commodity price index; UK PMI construction; 3 October: CH non-manufacturing PMI; AU home sales; AU trade balance; EU services PMIs; EU retail sales; US ADP employment; US ISM non-manufacturing index; 4 October: AU building approvals; AU retail sales; UK BoE decision; EU ECB decision; US jobless claims; US factory orders; US Fed minutes; 5 October: JN BoJ decision; EU German factory orders; US non-farm payrolls.
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