By Mike Jones
NZD
The NZD/USD has spent the past 24 hours consolidating above 0.8400.
Currency markets have started the week in a fairly drowsy state. Perhaps investors are fatigued after all the action last week.
Equity and risk markets did start the week in a slightly better mood, buoyed by the lack of G20 concern over Japan’s reflation policies and the re-election of the Italian President. But currency markets barely budged, apparently waiting on some of the more important events due later in the week.
The first of these comes this afternoon in the form of the April HSBC Flash Chinese PMI. The consensus expects a small dip to 51.5 from 51.6 in March.
The market is still a bit shaken up following the surprising weakness in last week’s China data. As a result, a downside surprise today would probably have the bigger impact on the NZD/USD and AUD/USD.
It’s worth noting, our NAB colleagues lowered their 2013 Chinese growth forecast to 7.9% in the wake of last week’s data, from 8.2% previously.
Following the China data, attention will shift to tonight’s key European PMIs. As we noted yesterday, market positioning means the NZD is particularly vulnerable to any nasty surprises on global growth this week. The balance of risks favours the downside.
Still, absent a full blown equity market meltdown, we think support in the 0.8250/0.8300 window will contain any near-term pull-backs in NZD/USD. Notable in this regard, our new short-term valuation model suggests current NZD/USD ‘fundamentals’ are equivalent to a short-term ‘fair-value’ range of 0.8450-0.8850.
Our analysis suggests the Fed’s quantitative easing policies are currently adding around 10 cents onto this ‘fair-value range.
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Majors
It’s been a fairly lacklustre start to the week in currency markets. The USD is a smidge stronger, although movements have been small and volumes noticeably subdued.
In Europe, equity market sentiment was bolstered by the surprise news Italian President Napolitano has agreed to stand for a second term. This is being seen by some as a precursor to a new coalition government being in place as early as later this week (although we are a little dubious about the likely effectiveness of such a government).
A marginally less negative-than-expected Eurozone consumer confidence reading also brightened the mood.
The Italian FTSE MIB soared 1.7% in response, kick-starting a broader rally in European bourses. Italian 10-year government bond yields, meanwhile, tumbled 20bps to 2½-year lows around 4.1%. Still, the EUR/USD failed to capitalise on the good cheer, and simply drifted sideways in a 1.3015-1.3085 range.
The EUR’s general lethargy may well reflect some important upcoming event risk.
Wednesday’s German IFO and tonight’s European Flash PMIs will provide important tests of the European (and global) growth pulse.
Broadly speaking, the consensus expects the PMIs to hold steady at weak levels. However, unexpected weakness could have an outsized negative impact on the EUR given European policy makers are now starting to talk more openly about possible ECB easing (including Constancio and Knot overnight).
We suspect EUR/USD bounces towards the 1.3157 200 d.ma. will attract strong selling. A decline to 1.2700 is expected by end-June.
Other news:
*European consumer confidence rises from -23.5 to -22.3 in April (-24.0 expected).
*US stocks are whipped around by more Q1 earnings reports. Caterpillar missed profit expectations and cut guidance for FY2013, but did say that the mining sector may have already troughed. Of the 107 S&P500 companies that have reported so far, 67.3% have reported positive earnings surprises.
*USD/JPY again fails to take out the key 100 level. Although reports in the FT that Japanese life insurance are starting to reduce their hedging ratios may see it fall before long.
*US Chicago Fed index and existing home sales data both come in a shade below market expectations.
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