U.S stock market back to pre-GFC highs on back of positive data and revived risk sentiment

By Mike Jones


The NZD/USD has continued to recover from Monday night’s lows over the past 24 hours. But overall movements in currency markets have been modest, with investors perhaps a little gun shy ahead of Thursday night’s ECB meeting.

Despite a string of NZD ‘positives’, including an on-hold RBA, surging milk prices, and upbeat global risk sentiment, the NZD/USD has only managed to squeak back up to 0.8320.

The RBA kept its cash rate unchanged at 3% yesterday, as all and sundry expected. But the tone of the post meeting statement gave the impression that, while a weak easing bias remains, the RBA is firmly “on hold” for now.

Australian interest rates took heed, paring the extent of expected RBA easing over the next 12 months from 50bps to around 35bps. The associated pullback in NZ-AU interest rate differentials took the NZD/AUD from 0.8120 to around 0.8080 yesterday.

Overnight, ‘growth-linked’ currencies like the AUD and NZD outperformed as a batch of encouraging services data reinvigorated risk appetite (see Majors).

The NZD received an extra boost from a stunning 10.4% surge in milk prices at last night’s auction. Prices are now up 23% on a year ago and a full 54% above their mid-May 2012 lows.

The auction result is certainty positive, but it needs to be seen in the context of lower volumes thanks to the worsening NZ drought.

Indeed, auction volumes were down 14% compared to forecast. Contracting supply set against solid demand should see prices continue to push higher in future.

For today, the Australian data feast continues with Q4 GDP. The market consensus expects a 0.6% quarterly gain (3.0%y/y), but our NAB colleagues are a little more bearish, picking 0.3%q/q.

A result close to this would likely see NZD/AUD claw its way back into the mid-0.8100s. In contrast, a GDP print at or above market expectations would threaten NAB’s forecast of three more RBA rate cuts this year.

In NZ, keep an eye on this morning’s (10:45am) Building Work Put in Place data. We are looking for this to register a volume gain of about 2.0%, following Q3’s 9.6%. We think the risk is for something even stronger.

Absent a disappointing Aussie GDP figure, we suspect the NZD/USD will continue to trade with a positive bias today. Dips back towards the 200 day moving average at 0.8300 should attract buyers, with another layer of support at 0.8280. Initial resistance will be encountered at 0.8350.


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The pendulum of investor sentiment swung back towards the more upbeat side overnight.

Global equity markets notched up decent gains and risk aversion indicators fell after a slew of encouraging services data revived risk appetite. However, this ‘risk-on’ sentiment hasn’t impacted greatly on currency markets which, for the most part, remain range-bound.

In Europe, February service sector PMIs came in mostly above expectations, with gains in Germany, France, Sweden and the UK. January Eurozone retail sales also impressed (1.2%m/m vs. 0.3% expected).

The data set the GBP and EUR on a path higher as European stocks jumped 1.4-2.8%. But it wasn’t long before a stronger USD put the kibosh on these moves.

Indeed, both the GBP/USD and EUR/USD have given up ½ cent through the latter stages of New York trading.

The US February ISM non-manufacturing index carried on the run of stronger US data, rising from 55.2 to 56.0 (55.0 expected). The increase was particularly heartening given the squeeze put on US incomes by the payroll tax.

Gains in longer-dated US bond yields in the wake of the figures supported a bounce in the USD. To some, this has been taken as further evidence the risk-on/weaker USD correlation is fading.

The restoration of economic ‘fundamentals’ rather than risk as the key driver of the USD would certainly be significant. But we are not yet convinced.

We’ll need to see a sustained period of improved US data and a removal of the downgrade threat before we properly sign up to this idea.

Tonight brings European GDP data, the BoE testimony before Parliament and US ADP employment figures, which will provide the usual cross-check on analyst forecasts for Friday’s all-important non-farm payrolls.

Other News:

*The US Dow Jones equity index rises around 1% to eclipse the pre-GFC highs and notch up a new all-time high.

*The UK PMI services PMI rises to the highest level since September (51.8 vs. 51.0 expected).

*China maintains its economic growth target of 7.5% and lowers its inflation goal to 3.5%y/y.

Event Calendar:

6 March: NZ building work; AU GDP; UK BoE testimony; EU GDP; US ADP employment; Bank of Canada; US factory orders & Fed’s Beige Book;

7 March: NZ wholesale trade; Bank of Japan decision; Bank of England decision; ECB decision; US jobless claims;

8 March: NZ manufacturing activity; JN GDP; CH trade balance; US non-farm payrolls; US unemployment rate.

All its research is available here.

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