By Mike Jones
NZD
After grinding up to almost 0.8270 through the European session, the NZD/USD has skidded back to around 0.8220 in late New York trade.
Once again, skittish sentiment around the US fiscal cliff has been responsible for most of this volatility. More rhetoric, more headlines, but very little has changed overnight.
Investors have simply checked earlier optimism that a deal on the fiscal cliff is likely to be reached anytime soon. This has taken a little of the heat out of risk appetite, equity markets, and ‘risk sensitive’ currencies like the NZD/USD.
Probably the more interesting story has been in the AUD.
Expectations the RBA will cut interest rates at the December meeting have really ramped up over the past 24 hours. OIS markets now price a ~75% chance of a 25bps cut.
This follows not only yesterday’s softer capex numbers (2.0%q/q vs. 2.8% expected) but also a swathe of dovish media commentary.
Most notable in this regard has been the widely reported call of the AFR’s Bassanese for a 50bps cut next week.
Alongside rising rate cut expectations, a bout of speculative AUD/EUR selling has seen the AUD/USD slip from 1.0480 to around 1.0430. This provided a brief boost to the NZD/AUD, but resistance at 0.7885 continues to cap near-term gains.
The weekend’s November Chinese manufacturing PMI will be important for the AUD and NZD. Forward indicators of Chinese economic activity continue to suggest a rebound is underway. The ‘flash’ PMIs improved in November. So an ‘official’ PMI result on or above the 50.8 the market expects would further underpin confidence in a sustained Chinese recovery, bolstering sentiment towards the AUD/USD and NZD/USD. Still, we’ll likely need to see a broader lift in risk appetite (fiscal cliff dependent?) for the antipodeans to break through topside resistance at 1.0485 and 0.8270 respectively.
For today, keep an eye out for October private sector credit figures for Australia and NZ. October NZ building permits data will also be released at 10:45am (NZT). This series is volatile and we wouldn’t be surprised to see a dip following September’s 7.8% jump (the third consecutive increase). Only a big decline would muddy the firm upward trend.
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Majors
Financial markets remain captive to sentiment around the US fiscal cliff. Yesterday’s cautious optimism in this regard was scuttled overnight. As a result, a strengthening in the ‘safe-haven’ USD has knocked most of the majors back down into the middle of recent ranges.
Comments from Republican House Speaker Boehner that there is a “real danger” of the US falling off the cliff and that “no substantive progress” has been made have seen risk sentiment sour once more.
As a result, another attempt by the EUR/USD to gain a foothold above 1.3000 has failed (that’s three failures this week), and ‘risk’ currencies like the NZD and AUD are ½ cent or more off their overnight highs. As noted yesterday, investor sentiment will likely continue to swing from anxiety to optimism on the cliff.
Neither of the debating parties has shown any real intention to compromise or relax their bargaining positioning. A deal still looks like a story for mid-December at the earliest, so we’d suggest fading any fiscal-cliff optimism in the short-term.
Despite fickle sentiment around the fiscal cliff, markets retain an overall upbeat tone, evident in modest equity market gains and a small fall in the VIX (risk aversion) index. This seems to be related to a positive view on Europe, a view reinforced by Greece’s latest bailout deal.
Peripheral European spreads have compressed noticeably of late and this continued overnight. Spanish 10-year yields hit an 8-month low around 5.2%.
Watch out for the German vote on the Greek aid package tonight. This should pass without incident, which may further bolster sentiment in European debt markets.
Other News:
* US data was mixed. Q3 GDP data was revised higher, but not by as much as expected (2.7%, from 2.0%, 2.8% expected). Pending home sales were strong in October at 5.2%m/m (1.0% expected). Jobless claims roughly as expected at 393k.
* The WSJ’s Hilsenrath says the Fed will start buying $85b a month of US Treasuries when Operation Twist rolls off.
* German unemployment rate steady at 6.9% as expected.
Event Calendar:
30 November: NZ building permits; JN jobless rate; EU German retail sales; US personal income; US Chicago PMI;
1 December: CH manufacturing PMI.
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