By Kymberly Martin
NZD
Despite a pull-back in global risk sentiment overnight, the NZD/USD paddled a very consistent path sideways. It currently trades at 0.8450.
While most market attention was on Europe overnight (see Majors) the NZD traded quietly between 0.8440 and 0.8470.
The currency however has been unable to break above this key resistance level that would take it to 1 ½ year highs. A break higher will be more challenging if the current more muted global sentiment persists.
Domestically, the Quarterly Employment Survey will likely garner more attention than usual today. The market will likely attempt to glean indicators for Thursday’s more important HLFS unemployment survey.
The NZD/AUD traded quietly around the 0.8110 level overnight. The key for the cross today will be the RBA meeting (4.30pm NZT). An ‘on-hold’ decision from the RBA could see a modest pull-back in the NZD/AUD as the market prices still prices around a 20% chance of a cut.
Still, over coming months we anticipate up to a further 75bps of cuts from the RBA while the RBNZ remains stoutly on hold. This is a key reason for our medium-term view of continued NZD/AUD strength.
Note that our short-term NZD/AUD valuation model currently estimates a ‘fair-value’ range of 0.8000-0.8200. This suggests any near-term pull-backs should be limited to around 0.8000.
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Majors
EUR weakness was the key theme overnight as European politics were back in the spotlight. The JPY and GBP outperformed.
Overnight, risk appetite was dampened as market focus returned to European politics. Spanish Premier Rajoy is facing opposition calls to resign amidst allegations of receiving illegal payments over a number of years.
In Italy, deposed Prime Minister Berlusconi is seen threatening leading candidate Bersani’s ability to win a majority in this month’s elections. Berlusconi is fighting on an anti-austerity platform.
These small reminders that the European crisis is not over, knocked our still healthy risk appetite index (scale 0-100%) from 82 to 79%. The Euro Stoxx 50 closed down 3.1%. The Italian FTSE MIB closed down 4.50%. The EUR/USD slipped from around 1.3640 to 1.3540.
The stark moves serve to illustrate the market’s vulnerability to set-back, given the relative complacency to risk priced by markets since the start of the year. Conversely, the USD index benefitted, rising from 79.20 to 79.50.
The ‘commodity-linked’ AUD, CAD and NZD all displayed fairly uneventful trading overnight while the attention was on Europe.
Heading into today’s RBA meeting the AUD/USD is sitting around 1.0420. The market prices less than a 20% chance of a rate cut today.
Clearly the delivery of a cut would therefore garner the greatest market reaction. Still, an ‘on-hold’ decision would likely send the AUD back towards 1.0500.
The downtrend in the JPY took a small breather overnight. As general risk sentiment soured the JPY appeared to take on its traditional role as a ‘safe haven’ currency. From an overnight peak above 93.10 the USD/JPY fell back to 92.60.
The GBP also experienced a night of outperformance. Partly technically driven, the GBP/USD rebounded from critical support at 1.5670 to trade around 1.5750 this morning.
Tonight, attention will return to European politics as the key driver of market sentiment. The final readings of European services PMI along with the US non-manufacturing ISM are also delivered.
Other News:
*US Dec Factory Orders, 1.8% vs. 2.3% expected
Event Calendar:
5 February: NZ QES labour survey; AU PSI; AU trade balance; AU RBA policy decision; CH HSBC services PMI; EU services PMI; EU retail sales; US non-manufacturing ISM;
6 February: AU retail sales; EU German factory orders;
7 February: NZ HLFS employment; AU NAB business confidence; AU employment; UK BoE policy meeting; EU ECB meeting;
8 February: AU RBA policy statement; CH trade balance.
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