By Mike Jones
NZD
Currency markets are essentially treading water ahead of the ECB vs. FOMC main event later in the week. As a result, the NZD/USD has spent the past 24 hours in a 0.8540-0.8585 holding pattern.
Yesterday’s ANZ Business Opinion Survey suggested there is every reason for us to remain optimistic that the economy is on a sound footing, but little reason for the RBNZ to be concerned about inflation.
On a seasonally adjusted basis, the ANZ’s own-activity index dropped to 31.8 in April from 36.3 in March. This was the lowest reading since last November, but remains consistent with GDP growth rising to around 3.5% - a figure similar to our own forecasts.
The lack of market reaction to the survey suggests none of this was of any particular surprise to the market.
There is no local data on the slate for today (although watch out for the GDT dairy auction early tomorrow morning).
However, all eyes will be on the release of China’s ‘official’ manufacturing PMI at 1pm (NZT). A tick down to 50.7 from 50.9 is expected.
The recent Chinese data tone has been disappointing so anything south of 50.5 would likely take a reasonable toll on the AUD and NZD. As usual, the AUD would be expected to suffer relatively more, supporting NZD/AUD.
Worth noting on the cross is the fact that, at 0.8265, it is now flirting with the upper bound of our short-term valuation model’s 0.8050-0.8250 ‘fair-value’ range.
Along with a daily RSI that has crept into ‘overbought’ territory, and an Australian market that is 40% priced for an RBA rate cut next week (we expect no change), this has us a little cautious about expecting additional near-term gains.
Nonetheless, we remain bullish NZD/AUD over the medium term, and target 0.8330 as the ‘take-profit’ level on our strategic long position.
On the day, NZD/USD resistance is eyed around 0.8590, with support likely to kick in on any pullbacks to 0.8475.
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Majors
The USD has softened relative to most of the major currencies overnight. Still, trading interest was relatively subdued as investors brace for the approaching FOMC/ECB/payrolls event risk three-peat.
Amid a slew of economic data, it was the Chicago Fed index that caught traders’ attention. A surprise dip back into contractionary territory (49.0 vs. 52.5 expected) knocked some of the wind out of the USD.
USD/JPY was dragged from above 98.00 to around 97.50, while the EUR/USD was lifted from 1.3080 to 1.3160.
Admittedly, the approach of tomorrow morning’s FOMC meeting and sliding US bond yields are adding to the downward pressure on the greenback.
10-year yields touched a 4-month low of 1.64% overnight as falling inflation (the core PCE fell to 1.1% on Monday) and deteriorating economic data has raised speculation the Fed could be a little more dovish this time around.
We doubt the Statement (released tomorrow morning at 6am NZT) will discuss additional asset purchases. Rather, it will simply toe a similar line to last time, and maintain the pace of asset purchases at US$85b/month.
In contrast, a rate cut from the ECB on Thursday looks to be locked and loaded following more evidence of soft inflation overnight. The April Eurozone CPI registered just a 1.2% gain (1.6% expected).
ECB rate cut hopes have provided a noticeable prop for sentiment of late, to the extent that weak data is now being interpreted as positive for equity markets and the EUR (Witness the gains in the EUR/USD overnight despite weak inflation, an increase in EU unemployment to a record high of 12.1%, another decline in Spanish GDP, and a fall in German retail sales).
The risk, then, is that if the ECB doesn’t cut, risk appetite and, perversely, the EUR/USD could come in for some heavy selling.
Other News:
*Spanish ‘flash’ Q1 GDP growth estimate comes in at -0.5%q/q, the 7th consecutive decline (as expected).
*US consumer confidence rebounds in April (68.1 vs. 61.0 expected).
*S&P/Case Shiller US house price index rises 1.2%m/m in February, the strongest in six years.
Event Calendar:
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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