By Mike Jones
NZD
The NZD/USD opens the week at familiar levels around 0.8480, having again failed to regain a foothold above 0.8500 on Friday night.
While the knee-jerk reaction to Friday’s uninspiring US GDP figures was to sell the USD, it wasn’t long before generalised risk appetite began to suffer.
And so, after flirting with 0.8530 for much of the session, the NZD/USD eventually settled back below 0.8500 as investors pared back ‘pro-growth’ positions.
We are medium-term NZD/USD bulls, but nonetheless find the near-term downside compelling.
Not only are market participants becoming more concerned about a second quarter slowdown in global growth, but the NZD remains susceptible to an adjustment in ‘extreme’ speculative positioning.
The latest IMM data shows net NZD longs, at 27.7k, are nearly three times the long-run average.
Still, whatever one’s view, there is a huge amount of event risk facing currency markets this week. The potential for NZD volatility is far higher than usual.
In this part of the world, China’s ‘official’ April PMI will probably be the most closely watched. A tick down to 50.7 from 50.9 is expected. Anything south of this is likely to take a swift toll on the AUD and NZD, although the AUD would suffer relatively more.
Note that, with RBA rate cut expectations ratcheting up again following last week’s weak AU CPI, we are more confident our short-term 0.8330 NZD/AUD target can be reached.
On the global slate, Friday’s US employment report and mid-week policy meetings from the ECB and FOMC are likely to keep markets buzzing.
Closer to home, Tuesday afternoon’s ANZ business survey will be the highlight of the local event calendar. We believe this will stay about as upbeat as it was in March, so consistent with annual GDP growth in the range of 3-4%.
There’s also some commodity price flavour to keep an eye on this week. We’re wary of a correction in milk prices at Thursday morning’s dairy auction, but are bracing for a big (7-8%m/m) gain from the ANZ commodity price index.
Initial resistance for the NZD/USD is expected to kick in on bounces towards 0.8550. Near-term support will be found around 0.8400.
We suspect the currency will spend most of its time this week chopping around inside this range.
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Majors
Friday night’s price action was all about the disappointing US Q1 GDP figures.
The downside miss (2.5% annualised vs. 3.0% expected) added to the miserable tone of recent US data, and took a noticeable toll on US bond yields and the USD.
Still, the greenback’s losses were mostly confined to USD/JPY and the other low yielding majors. A deterioration in general risk sentiment (global stock indices down 0.2-0.8%) ensured ‘risk’ currencies like AUD and NZD underperformed.
The big news over the weekend was the tentative formation of an Italian government. A three-party coalition has been agreed upon, ending a two month political standoff.
Italian bond yields moved steadily lower in anticipation last week, so the extent of EUR/USD upside from the news is probably limited. Moreover, concerns about the stability of the new government may see sellers continue to emerge on bounces towards 1.3100.
The approach of Thursday’s ECB meeting amplifies the near-term headwinds facing the EUR. Spluttering European activity and a subdued inflation outlook means we now expect the ECB to cut its refi rate 25bps to 0.50% (while leaving the deposit rate at zero).
While the market is increasingly expecting a cut, we nevertheless expect the EUR to remain heavy going into Thursday’s meeting. A EUR/USD move back below 1.3000 looks likely.
The FOMC also meets this week, but a slowing US economy means we doubt we’ll see any material changes to the Fed’s bias. The current (US$85/month) pace of assets purchases is expected to be maintained.
More important for currency markets will be Friday’s non-farm payrolls employment report for April. A 150k jobs gain is currently expected (expect the usual rejigging of forecasts after Wednesday’s ADP report).
Anything less is likely to see the USD weaken, with the DXY index possibly setting its sights on an 81 handle.
Other News:
*The Bank of Japan kept policy unchanged but revised up its inflation forecast on Friday, as expected.
*US University of Michigan consumer confidence offsets some of the US GDP gloom, rising to 76.4 (73.5 expected).
Event Calendar:
29 April: EU German CPI; US pending home sales; US Dallas Fed index;
30 April: NZ building permits; NZ ANZ business confidence; AU private sector credit; JN jobless rate; NZ household credit; EU unemployment;
1 May: AU house prices; AU RBA’s Edey speaks; UK manufacturing PMI; US ADP employment; US ISM manufacturing index; US FOMC decision;
2 May: NZ ANZ commodity prices; AU building approvals; CH HSBC manufacturing PMI; EU PMIs; EU ECB decision; US jobless claims
3 May: CH non-manufacturing PMI; US non-farm payrolls; US factory orders; US Fed’s Lacker speaks.
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