NZD vulnerable to event risk, but recent gains against the AUD expected to hold; conflicting global data

By Mike Jones

NZD

The NZD has underperformed over the past 24 hours. The NZD/USD is around ¾ of a cent below yesterday’s 0.8270 levels.

NZD/AUD has also given up some of its recent gains, slipping from 0.8060 to 0.8020.

For the most part, these moves appear to reflect profit taking and speculative position adjustments as we head into a busy period for event risk.

Tonight, the ECB and Bank of England meet. Tomorrow, there is the Bank of Japan meeting, with the all important US non-farm payrolls figures due later that night.

Last night’s news flow was actually mildly NZD positive, reinforcing the notion the modest sell-off was positioning driven.

European and US data printed a shade better than expected (see Majors), underpinning small gains in global equity markets.

Our risk appetite index (scale 0-100%) ticked up from 72.7% to 74.1%.

The NZD/USD is now flirting with the key 0.8185 support level. Should this level break, we could see a deeper correction back towards 0.8000.

However, for the NZD/AUD, we look for support at 0.7950 to hold.

NZD/AUD momentum is positive and, according to our momentum model, is likely to remain so while the currency trades above 0.7874. Moreover, the indications from the latest IMM data are that the speculative community are net short NZD/AUD, meaning speculative positioning does not present an impediment to additional NZD/AUD gains.

Lastly, the NZD/AUD is not yet ‘expensive’ according to fundamentals, despite the speed of the recent rally. Our short-term valuation model suggests a 0.8000-0.8200 ‘fair-value’ range for the cross.

Ahead of tonight’s heavy schedule of event risk, keep an eye on this afternoon’s monthly retail and building approvals figures from across the Tasman.

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Majors

Conflicting global data and caution ahead of upcoming event risk saw the major currencies mostly drift sideways overnight.

Stock markets are mixed to up slightly, commodity prices are broadly unchanged (although oil prices are down sharply), and risk aversion indicators like the VIX are generally lower.

Last night’s European services PMI and retail sales data was a smidge stronger than analyst expectations, providing a brief boost for the EUR.

But, while the headline services PMI index looked ok (46.1 vs. 46.0 expected), the readings for France, Spain and Germany noticeably undershot expectations.

Looking at the bigger picture, the Eurozone still looks set to enter recession in Q3 and we look for further weakness in Q4 as the sovereign debt crisis rumbles on. We suspect weak economic fundamentals will limit EUR/USD rallies to 1.3300 this year.

The UK services PMI slipped to 52.2 (53.0 expected), hot on the heels of negative surprises on manufacturing and construction earlier in the week. GBP/USD slipped from 1.6130 to 1.6080 in response. Activity in the service sector is expanding, but growth remains very weak in the UK. We expect the Bank of England will keep rates and asset purchases unchanged tonight, but expect an additional £50b of QE and potentially a 25bp cut in the Bank Rate in November. Given this, GBP underperformance looks set to continue.

Along with the BoE, the ECB also meets tonight. Following last month’s bond buying announcement, there is only a slim chance of further easing being announced.

But any hints from the ECB that further stimulus is being considered may actually see the EUR higher. Tomorrow morning’s FOMC minutes will provide more background on the Fed’s decision to launch QEIII, but are unlikely to be particularly market moving.

Other news:

- Australian August trade data was truly awful. The trade deficit widened by almost $500m, to $2,027m (market expectations $670m). This is the largest deficit since March 2008. The deterioration was driven by a 3% fall in exports, once again impacted by weak commodity prices.

 - Spanish PM Rajoy continues to play down bailout speculation.

- US data retains its improving tone; ADP employment rises 162k in September (140k expected), and the ISM non-manufacturing index jumps from 53.7 to 55.1 (53.4 expected).

Event Calendar:

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.

All its research is available here.