By Mike Jones
NZD
After marching higher all week, the NZD has paused for breath over the past 24 hours.
Still, on a trade-weighted basis, the NZD is trading around 5-year highs and is just 2.5% below the post-float highs of July 2007.
The NZD/USD climbed to a fresh 9-month high around 0.8460 overnight. But a few fiscal-cliff inspired wobbles in global equity markets has since taken some of the heat out of risk appetite.
The same can be said for S&P’s decision to revise the outlook on the UK’s rating to negative.
The NZD/USD has slipped back to around 0.8430 as a result. Last night’s NZD/USD pull-back smacks of profit-taking after this week’s steep run-up.
We still expect the 2012 high at 0.8471 to be breached in coming sessions.
Looking further ahead, investors are starting to wonder if a test of the July 2011 0.8840 post-float high is possible. NZD/USD momentum is certainly positive, but a quick glance at the ‘fundamentals’ suggests a push above 0.8800 could be a bridge too far.
Not only are NZ-US interest rate differentials nowhere near as supportive as July 2011, but NZ commodity prices are around 13% off their peaks, and the USD index is stronger. Providing some offset, global risk appetite is currently more buoyant than July last year.
But plugging all of this into our valuation model still suggests “fair-value” in the NZD/USD is around 5 cents lower now than at the time of the July 2011 post float highs.
For today, we suspect the NZD/USD will see out the week in the 0.8400-0.8460 range.
The only event risk of any note is the HSBC Chinese Flash manufacturing PMI, due 2:45pm (NZT). This is expected to consolidate above the 50 level consistent with expansion. With a Chinese growth rebound increasingly in the price, the NZD/USD would be most sensitive to any downside misses from the PMI.
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Majors
Most of the major currencies have spent the past 24 hours consolidating their post-Fed gains of yesterday morning.
The CHF has been the notable outperformer after the Swiss National Bank maintained its EUR/CHF floor at 1.2000 (there had been some chatter about an increase). Meanwhile, the GBP was the weakest performer after S&P revised the outlook on the UK’s AAA rating to negative.
Risk sentiment started the night on the front foot. European finance ministers agreed on a framework for a common banking supervisor (paving the way for a banking union) and formally approved the latest Greek aid package, worth €49b.
What’s more, US retail sales for November managed to notch up a respectable increase, despite the effects of Hurricane Sandy (+0.7%m/m ex auto and gas, vs. 0.4% expected).
European equity markets opened in positive territory and the EUR/USD again pushed up towards 1.3100. However, negative sentiment around the fiscal cliff later took some of the gloss off, halting the gains in the majors and kick-starting a late recovery in the USD.
Republican House Speaker Boehner said the White House “appears willing to go over the cliff”. We can expect more of this sort of rhetoric as two negotiating sides trade blows in the lead up until the 31 December deadline. This may act to counteract the best efforts of the Fed to further juice up risk sentiment and undermine the USD.
However, we still believe the EUR/USD is poised to head higher. Near-term resistance at 1.3130 should eventually be overcome.
For today, currency markets look set to finish the week in consolidation mode. Keep an eye out for the Japanese Tankan, one of the few Japanese data releases known to actually impact the JPY. Analysts expect a deterioration to -10 in Q4, from -3 in Q3.
Other News:
* The UK CBI survey for December was less downbeat than expected (-12 vs. -15 expected).
* US PPIs fall 0.8%m/m in November (-0.5% expected).
* US jobless claims 343k, below the 369k expected.
Event Calendar:
14 December: JN Tankan; CH HSBC flash PMI; EU PMIs; US CPI.
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