By Mike Jones
NZD
The double whammy of creeping global risk aversion and dismal NZ economic data saw the NZD slip to the bottom of the currency performance rankings last week.
Lacklustre global risk sentiment kept the NZD/USD on the back-foot on Friday night, such that it opens the week around 0.8150 – 1.3% down on week-ago levels.
Until Thursday’s terrible NZ employment figures were released, we were starting to contemplate a NZD/USD break out of the top end of the 0.8100-0.8350 range. But with the risk of an RBNZ interest rate cut now very real, the NZD/USD topside looks unlikely to be tested.
Nonetheless, we doubt we’re on the cusp of a substantial downward correction. Improving prospects for the global economy (rebounding China, better US data, stable European debt markets) and rising NZ commodity prices mean we continue to target 0.8200 for the NZD/USD by year-end.
Upcoming local data seems unlikely to alter investors’ downbeat perceptions of the NZ economy.
Most notably, this week’s quarterly retail survey may show spending contracted through the third quarter. BNZ economists forecast a 0.1% fall in retail volumes, below the +0.4% forecast by consensus.
Thursday’s consumer confidence figures will be flat at best and a likely fall in October food prices (Tuesday) will reinforce the soft NZ inflation environment.
If this week’s data compels markets to price in a greater chance of RBNZ rate cuts (20bps of cuts currently priced), the NZD/USD could fall a little further.
But keep an eye on the global backdrop as well. Greece’s latest bailout package should get signed off this week and the US data tone remains encouraging. These factors may limit further downside in risk appetite and the NZD/USD. Solid support is eyed around the 200-day moving average at 0.8080.
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Majors
Financial market sentiment ended last week on a softer footing. Equity markets were mixed on Friday night, but the VIX index (a proxy for risk aversion) moved higher, proffering support to the USD.
The ‘safe-haven’ USD and JPY outperformed last week. Not only did US fiscal cliff concerns return to the fore, but the situation in Spain and Greece remained unresolved.
Reflecting the renewed uncertainty about the global outlook, risk aversion and currency volatility measures moved higher, but nevertheless remain very low relative to historical norms.
Looking ahead, a light week for economic data means US fiscal cliff and Greek budget issues are likely to remain front and centre for currency markets.
The Greek parliament approved the necessary reforms package last week. It is due to vote on the 2013 budget as we write.
If the budget is approved, another €31.5 in aid should be signed off at tonight’s Eurogroup meeting. If all of this goes to plan, we’d expect to see a mild relief rally in European equities and the EUR.
However, some news reports over the weekend have suggested delays are likely. So it’s going to be a case of watching the newswires today.
The weekend’s Chinese trade data had something for everyone. An 11.6%y/y surge in exports (10% expected) supports the idea the economy is rebounding and the government’s 7.5% 2012 growth target is on track.
But underwhelming imports (2.4%y/y vs. 3.4% expected), particularly from Australia (-21%y/y), will probably prevent an enthusiastic ‘buy-risk’ reaction to the data this morning.
As for central banks, Thursday morning’s FOMC minutes should provide few surprises. They will be interesting for any comments/suggestions around the Fed’s likely response to the end of ‘Operation Twist’.
In the UK, Wednesday night’s Bank of England inflation report will hopefully shed some light on whether the MPC are likely to resume quantitative easing or keep pinning their hopes on the Funding for Lending scheme.
Hints the BoE are done with QE for now would likely shore up GBP/USD support around the 200 d.m.a (at 1.5850).
Whether the USD continues to climb this week depends on whether worries about the US fiscal cliff more than offset any relief over the plight of Greece. Near-term, support of the USD index is eyed around 80.70. Resistance is expected on bounces towards 81.80.
Other News:
*Bundesbank President Weidman says politicians have already decided to bail out Greece (again).
*US data remains positive – the University of Michigan consumer confidence survey hit the highest level in 5-years (84.9 VS. 82.9 expected) & US wholesale inventories rise by the most in 9 months.
Event Calendar:
12 November: EU Eurogroup meeting; JN GDP; 13 November: UK RICs house prices; NAB business conditions; NZ food prices; UK PPI; UK CPI; EU German ZEW; 14 November: NZ quarterly retail sales; AU consumer confidence; AU wages; UK ILO unemployment; UK BoE inflation report; EU Italian bond auction; US retail sales; US FOMC minutes 15 November: NZ job ads; NZ manufacturing PMI; NZ ANZ consumer confidence; AU inflation expectations; EU Eurozone GDP; UK retail sales; EU Eurozone CPI; US Empire manufacturing; US CPI; US Philadelphia Fed index; 16 November: US industrial production.
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