By Kymberly Martin
NZD
The NZD/USD has lurched around a bit over the past 24-hours but has returned to trade just above 0.8400.
The NZD/USD initially took a leg downward after softer-than-expected China PMI data yesterday.
However, it recovered overnight in the backdrop of weak European currencies, to trade at 0.8400 currently.
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.
However, the ‘risk sensitive’ NZD remains vulnerable to any short-term pullbacks in global risk appetite. In this regard, key tonight will be the German IFO business survey.
Given signs of recent weakness in ‘core’ Europe the market will be in no mood to absorb any disappointment.
The NZD/AUD cross has mostly traded a range between 0.8170 and 0.8210 over the past 24-hours. It may be a lively day for the cross today with the RBNZ meeting (9.00am NZT) and AU CPI release (1.30pm NZT).
We expect a fairly balanced statement from the RBNZ. In recent weeks the market has already reduced expectations for RBNZ activity. The market prices the RBNZ being ‘on hold’ well into next year.
The market would therefore need to start pricing rate cuts if yields are to fall from current levels, and thereby undermine the NZD’s interest rate differential support.
We think the RBNZ’s statement will give sufficient emphasis to the risks of house price pressures, and the solidity of economic momentum and confidence indicators to preclude this outcome.
However, it would not be a surprise to see the ‘strong’ NZD to be given some ink in the statement.
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Majors
The USD strengthened against all its peers over the past 24-hours, after disappointing Eurozone PMI data.
Overnight, broad risk appetite recovered a little (our risk appetite index moved up to 75%).
European equities closed up strongly, continuing the saw-tooth pattern of trading seen in recent weeks. The Euro Stoxx 50 closed up 3.10% boosted by solid earnings reports and speculation the ECB may be prompted to cut interest rates.
Overnight, the Eurozone composite PMI data remained firmly in contraction at 46.5 as expected. The EUR/USD initially surged higher after the France PMI came in above expectation.
This was short-lived however, as German PMI data then came in below expectation. Both German manufacturing (47.9) and services (49.2) are in contraction, as the woes of the periphery have now infected the ‘core’ of Europe.
The EUR/USD then plunged from 1.3080 to below 1.2990. Our forecasts see a decline to 1.2700 by end-June.
Conversely, the USD index was propelled from close to 82.50 to sit above 83.00. Key resistance for the index remains at the early-April highs of 83.50.
There was high drama in the trading of the JPY early this morning. Around 5.00am this morning the Associated Press had its Twitter account hacked, announcing an explosion at the White House.
The USD/JPY gapped from around 99.30 to below 98.60. This false information was quickly denied and the USD/JPY quickly returned to trade above 99.40 this morning.
The AUD/USD gapped lower yesterday afternoon after a disappointing China HSBC flash manufacturing PMI release (50.5 vs. 51.5 expected). However, it soon found its feet returning to trade at 1.0260 this morning.
The key for the AUD today will be the release of AU Q1 CPI. The risk is a low-side surprise (we and consensus expect trimmed mean at 0.5%q/q) would see the market ramp up expectations for a cut at the RBA’s May meeting (currently priced at 30%). This would see a lower AUD/USD.
The key tonight will be the release of the German IFO business survey. The market will be particularly sensitive to any further signs ‘core’ Europe is under pressure. Italy will also auction bonds.
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