By Mike Jones
NZD
After spending most of the past 24 hours consolidating above 0.8100, an early morning slide has left the NZD/USD flirting with key technical support at 0.8080 (which also happens to be the 200-day moving average).
Yesterday’s local economic data provided a welcome relief from all the doom and gloom of the past few weeks.
The NZ PMI crept back into expansionary territory, rising from 48.2 to 50.5 in October. And the ANZ consumer confidence index actually increased, to levels not far off the long-run average.
Notably, the more positive economic news brought to a halt the recent slide in NZ swap yields. As a result, NZ-US 3-year swap differentials – a key fundamental driver of the currency – have managed to hold their ground around 225bps.
Nonetheless, the NZD/USD continues to dance to the beat of investor risk appetite. Another gloomy night in US and European equity markets has dented sentiment towards high risk currencies like the NZD.
Still, the kiwi’s partner in crime the AUD has suffered relatively more. Not only did a trimming of speculative longs weigh on the AUD, but metals prices were down across the board overnight. A daily close below the 200-day m.a at 1.0325 (spot currently around 1.0320) would reinforce negative AUD/USD sentiment.
Yesterday’s RBA October FX transactions report revealed a small increase to $483bn of ‘other outright’ transactions. This adds to market speculation the RBA is engaging in ‘passive intervention’ through off market AUD transactions with other central banks.
We wouldn’t necessarily classify these actions as FX intervention per se, but the high degree of media publicity about the issue may be helping to limit AUD upside.
It’s an extremely quiet end to the week as far as event risk and economic data goes. This means equity market sentiment and risk appetite will remain the key drivers of the NZD and AUD.
Sentiment is undoubtedly negative at present but we’d expect exporter and real money buying interest to keep the NZD/USD supported above 0.8050 on the day.
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Majors
Groundhog Day. European currencies again outperformed overnight. In contrast, high-beta currencies like the AUD and NZD have suffered from a furthering paring in risk appetite.
And the JPY has continued to lag all of the majors following Thursday’s early election announcement.
Two days of sharp gains have left USD/JPY above 81.00 – the highest since April. It now looks as if the Japanese election will take place on December 16th, with the opposition LDP party well ahead in the polls.
LDP leader Abe has been outspoken in his calls for the BoJ to get more aggressive in its efforts to weaken the JPY.
While these calls have undermined the JPY, we note that JPY ‘fundamentals’ point to a good chance of a snap-back down in USD/JPY. Two year US-JP bond spreads – a key fundamental driver of USD/JPY – have actually fallen in the past few days, and suggest the currency should be trading below 79.00.
It seems US markets remain preoccupied with the risks from the fiscal cliff. Stock markets notched up their second day of losses and the VIX index (a proxy for risk aversion) is higher at around 18.5%.
Admittedly, last night’s surprisingly weak US data (see below) may have contributed to the ‘risk-off’ tone, although we may be seeing some of the impact from Hurricane Sandy here.
Stuttering risk sentiment has weighed on the NZD, AUD, and CAD. However, a stronger EUR has helped limit the declines. Last night’s preliminary European GDP data matched expectations for a 0.1% fall in Q3 (confirming a technical recession).
But markets were happy to play up the positives in the release. Investors took heart in particular from signs of resilience in the Germany and French economies.
GDP in these economies expanded 0.2%. This was enough for European currencies to outperform and the EUR/USD to continue this week’s climb, finishing the night around 1.2790.
More timely data points toward a possible slide into negative territory for France and Germany in Q4. Indeed, any rebound in Eurozone activity will not come until the second half of next year, in our view.
This weak fundamental backdrop suggests the EUR/USD won’t be trending higher on a sustained basis for some time.
Other News:
* The Olympic hangover drags UK retail sales down by 0.7% in October, a much sharper fall than the 0.1% dip expected.
* US Phillie Fed index plunges back into negative territory (-10.7 vs. +2.0 expected) and jobless claims record a surprise increase (to 439k, well above the 375k expected).
* US CPI increases 0.1%m/m in October (as expected), bringing annual inflation to 2.2% (2.0% ex food & energy).
Event Calendar:
16 November: US industrial production.
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