Investors hopeful Spain will apply for official aid before EU Summit despite reports suggesting more likely to be November

By Mike Jones

NZD

Last week’s global news offered little to alter perceptions on the plight of Europe, or the global economy more generally. As a result, currency markets drifted. The NZD/USD floated sideways in a relatively tight 0.8150-0.8230 range.

The price action in NZD/AUD was a little more exciting. The cross slipped from lofty levels around 0.8050, to closer to 0.7980. Rather than any shift in ‘fundamentals’, this more reflected a rush to take profit on speculative NZD/AUD long positions.

Looking ahead, we remain constructive on the outlook for NZD/AUD, and continue to view pull-backs to 0.7950 as buying opportunities. In our latest Global FX Strategist, we maintained our year-end NZD/AUD target of 0.8200, and put a stop/loss of 0.7930 on our long-held NZD/AUD long position.

For this week, there are plenty of global events to help shape sentiment in currency markets (see Majors). The approaching EU Summit will certainly occupy plenty of column inches.

But it’s this week’s Chinese data that will likely prove more important for the NZD, in our view. Chinese data over the past month or so has failed to show any response to recent policy stimulus. Investors are hopeful this week’s September data will provide some evidence of a bottoming in activity. Further weakness could prove to be the catalyst for a sustained break of 0.8145 support on NZD/USD.

Domestically, it’s all about Tuesday’s CPI. The modest 0.4% quarterly increase we’re picking is softer than the market’s 0.6% and the Reserve Bank’s estimate of 0.5%, and would further clip annual CPI inflation to 0.9%, from 1.0% in Q3. This sort of outcome could drag the NZD/USD a little lower, but the backward-looking nature of the data should limit market reaction to some extent.

Wednesday morning’s GDT dairy auction will also be worth a look. While there is still the price support proffered by the US drought, this may be balanced by the headwinds from a stronger dollar compared to the previous auction. ANZ job ads are due Thursday and on Friday we get net migration data.  The latter should remain fundamentally weak.

All up, the NZD/USD still looks a little susceptible to the downside. A daily close below the key 0.8145 support level would see momentum factors flip from neutral to negative, paving the way for a test of 0.8070. Short-term resistance is expected to kick in around 0.8240.

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Majors

The major currencies remained range-bound last week. The USD index currently sits around the middle of the well entrenched 79.20-80.20 range.

On Friday, rumours of a weekend Spanish bailout request and a surprisingly positive US consumer confidence reading initially bolstered risk appetite, weighing on the ‘safe-haven’ USD. But the positive sentiment soon faded amid a string of lacklustre US earnings reports. Equity markets and commodity prices ended the night in the red.

Overall, last week offered little to alter perceptions of global growth. However, this week could be a bit more exciting.

A series of Chinese data will test investors’ expectations China is still headed for a soft landing. Chinese trade data released over the weekend was fairly encouraging. September exports expanded at twice the expected pace (9.9%y/y vs.  5.5% expected). But the bigger test will come with Thursday’s GDP, retail sales, and industrial production figures.

The Chinese CPI is released today. Broadly speaking, the market is expecting Chinese activity to stabilise in September (GDP expected to be 7.4%y/y). So evidence of a continued Chinese slowdown would likely weigh on risk sentiment, spurring AUD and NZD to underperformance.  

In Europe, all eyes are on the EU Summit kicking off on Thursday night. Investors are still hopeful Spain will apply for official aid before the Summit. If they do, expect to see a pop higher in EUR/USD and EUR crosses.

However, weekend reports suggested Spain could delay until November. Such a delay would present mild headwinds for the EUR in our view. Greece is also creeping into the headlines again. At this stage, it looks as if they have done enough for the Troika to sign off on the next tranche of bailout cash.

It’s also shaping up as a busy week for US data (see event calendar below). Recent US data has generally printed stronger than market expectations ­– our US data surprise index is strongly positive.

This has helped keep global growth expectations on track and risk appetite buoyant. Investors are looking for further improvement this week. If these expectations are disappointed, expect the USD to find support from softer risk sentiment.

For today, the positive Chinese trade data from the weekend should ensure ‘growth-sensitive’ currencies like the AUD, NZD and CAD start the week on the front foot. This should see the USD a little weaker. However, near-term support on the USD index at 79.30 should hold.

Event Calendar:
15 October: NZ PSI; UK house prices; AU home loans; CH CPI & PPI; US Empire manufacturing; US retail sales; US Fed’s Lacker and Bullard speak; 16 October: NZ CPI; AU RBA Board minutes; UK CPI; EU German ZEW; US CPI; 17 October: UK BoE minutes; US housing starts; 18 October: NZ job ads; AU NAB business conditions; CH industrial production, GDP, retail sales & investment; US Philadelphia Fed index; EU European Summit begins in Brussels; 19 October: NZ net migration; US home sales.

All its research is available here.