Likely recommitment to QE from the Fed has capacity to undermine the USD

By Mike Jones

NZD

The NZD has been the weakest performing currency over the past 24 hours, in a generally slow start to the week in currency markets. After opening the week around 0.8360, the NZD/USD slipped back to around 0.8300 overnight.

It’s difficult to pinpoint the exact catalyst for the kiwi’s decline. Broadly speaking, it’s been a mixed night in markets with idiosyncratic factors rather than general themes the key drivers.

However, we can point to investors’ more cautious attitude towards ‘risk’ (our risk appetite index fell from 85.4% to 83.5%), losses in Asian currencies (see Majors), selling from technical players, and media headlines about Dicyandiamide (DCD) being found in NZ milk as all contributing.

NZD/EUR has also continued on its southward path, weighing on the NZD more generally. We think the downward correction has further to run as less negative European economic data and improved EU financial conditions causes investors to reassess their underweight EUR positions.

The key level to watch is 0.6160. A break below here would clear the way for a deeper pullback towards 0.6050.

We don’t expect any sustained NZD impact from media reports about traces of DCD being found in NZ milk. Put simply, there is no food safety issue here.

Only around 5% of farmers use DCDs, and the minute traces found were around 100 times lower than levels acceptable under European food safety limits.

If there is any premium being applied to the NZD as a result of the media reports, we’d expect it to be priced out before long, potentially supporting the currency.

Indeed, if the US FOMC reasserts its dovish bias this week, and the RBNZ decision is about as boring as we expect, we doubt the NZD/USD sell off will extend much further. Support at 0.8280 looks solid.

Today brings NZ trade balance figures at 10:45am (BNZ -$125m, market -$105m) and, across the Tasman, the NAB business confidence index for December (1:30pm NZT).

-----------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

------------------------------------------------------------------------------------------------------------------

Majors

It’s been a night of whippy price action in tight ranges for most of the major currencies. The underperforming GBP and NZD are obvious exceptions.

There’s been a little more action in emerging market currencies. KRW tumbled 1.7% yesterday (USD/KRW rose above 1090) after a “somewhat weaker” outlook for demand from Samsung.

Creeping concerns about the strength of Asian economies would certainly help explain the lacklustre performance of the NZD and AUD over the past 24 hours.

In contrast, the BRL surged almost 1.4% (USD/BRL down to 2.0005) after a surprise intervention from the Brazilian government.

Fixed income markets have also been amongst the bigger movers. Benchmark yields are generally higher, with the run-up in US yields (10-year up 4bps to 1.98%) assisted by a solid reading on December durable goods orders (4.6%m/m vs. 2% expected). Admittedly, this was mostly driven by a jump in aircraft orders.

Still, the gains in US yields didn’t flow through to a higher US dollar. The USD index spent the night shuffling sideways in a tight 79.75-79.90 range. Equity markets have been similarly becalmed. Most of the major equity indices are a few points either side of flat.

Looking ahead, a packed schedule of event risk should reinvigorate markets later in the week. Out of the US, not only do we get Q4 GDP and non-farm payrolls, but Thursday morning brings the latest policy statement from the FOMC.

The consensus expects US growth to slide back to a 1.2% (annualised) pace in Q4.  Such an outturn, particularly following a likely recommitment to QE from the Fed, has the capacity to undermine the USD and send the EUR/USD through weak resistance at 1.3480.

It’s also global PMI week. Evidence of a gradual recovery should be evident from Chinese and European PMIs, to be released late on Friday (weakness in the UK edition will likely provide the exception).

This was the general message from the more timely ‘Flash’ measures. Further signs of recovering global growth would refresh investors’ risk appetite and bolster demand for ‘growth-sensitive’ currencies like the AUD and NZD. Tonight, there is just US consumer confidence to watch for.

Event Calendar:

29 January: NZ trade balance; AU NAB business confidence; US consumer confidence;

30 January: NZ building permits; JN retail trade; EU economic confidence; US ADP employment; US GDP; US FOMC;

31 January: NZ RBNZ OCR review; AU home sales; EU German unemployment & CPI; US jobless claims;

1 February: NZ migration; NZ RBNZ Governor speech; CH manufacturing PMI; EU European PMIs; US non-farm payrolls; US ISM manufacturing.

All its research is available here.