By Mike Jones
NZD
The NZD/USD spent most of last week bouncing around in a sideways 0.8460-0.8580 range as global risk sentiment ebbed and flowed.
On Friday, an upbeat US jobs report re-established faith in the US and global recoveries, bolstering risk appetite, commodity prices, and ‘high-beta’ currencies like the NZD and AUD.
The more optimistic backdrop carried the NZD/USD from below 0.8500 up to around 0.8540.
The NZD has so far proved relatively resilient to signs global growth has slowed in Q2. It seems the strength of the domestic economy, a rising terms of trade, and a juicy interest rate differential are supporting the currency and preventing large scale falls.
These are themes we highlighted in our Q2 “Markets Map”, and more of the same is expected.
With the global data calendar fairly quiet (see Majors), local event risk is expected to drive the NZD this week.
In NZ, all eyes are on Thursday’s Household Labour Force Survey. This survey has produced huge NZD reactions in the past, in part because it is so volatile and hard to read.
This week’s Q1 edition could either: 1) remain weak, which would likely be dismissed by local markets or 2) catch up to the general improvement in other labour indicators.
In other words, the risks to the NZD are asymmetrically tilted to the upside. Formally, we are picking a 0.3% rebound in employment and an unemployment rate of 6.7% (market +1.0% and 6.8%).
There will also be plenty of NZD direction coming from across the Tasman this week. Expectations for Tuesday’s RBA meeting are finely balanced.
Most economists (including our NAB colleagues) expect rates to remain on hold, but the market is 57% priced for a cut. This suggests there will be volatility whatever the decision.
If the RBA does not cut, we would look to use the consequent AUD bounce as an opportunity to buy NZD/AUD on a dip.
As outlined in Friday’s strategy note, we expect further appreciation in the cross this year; our year-end forecast is 0.8500.
Aside from the RBA, Thursday’s AU employment report and Chinese CPI data will also be important for the NZD. Overall, we hold a mild positive bias for the week; another test of 0.8600 looks likely. Dips towards 0.8460 should be met with strong support.
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Majors
Financial market sentiment soared on Friday night following the release of April’s upbeat US non-farm payrolls data.
The 165k jobs gain (145k expected) and fall in the unemployment rate (to 7.5% from 7.6%) saw US bond yields roar higher, and equity markets and commodity prices notch up big gains.
The S&P500 climbed 1.05%, 10-year treasury yields rose over 10bps, and the CRB commodity price index leapt 1.2% (led by a 6.4% surge in copper prices).
However, the reaction in currency markets was more subdued. As expected, the ‘pro-risk’ AUD and NZD outperformed, with the USD and JPY suffering from a culling of ‘safe-haven’ trades. But overall movements were mostly confined to recent ranges.
Nonetheless, a jolt higher in USD/JPY from 98.00 to above 99.00 on Friday will have encouraged JPY bears, and put a test of the hitherto unassailable 100 barrier back onto many investors’ radar.
Japanese markets return from Golden Week this week, and policymakers may be tempted into another bout of JPY jawboning.
There will be scant USD/JPY direction coming from the US side this week, with the US event calendar fairly bare. A series of Fed speakers (Stein, Plosser, George, Evans, and Bernanke) will probably attract the most attention.
In the UK, the May BoE meeting should be a fairly boring affair, and shouldn’t trouble the GBP. We expect the MPC to keep rates at 0.5% and asset purchases capped at £375b as it waits to see whether credit easing measures will boost activity.
Recent UK data has tended to beat (admittedly low) market expectations, producing a marked short squeeze in GBP/USD.
With net short positions in GBP still large, there is room for this to continue in the short-term. Key data to watch this week are March manufacturing and industrial production. Signs of a bottoming should be evident in both.
Other News:
*The ECB’s Nowotny says negative interest rates are not being considered, before later apparently backtracking on the statement.
Event Calendar:
6 May: NZ Crown Financial Statements; AU retail sales; AU job ads; EU PMI services (final); EU retail sales;
7 May: NZ LCI/QES wage reports; AU trade balance; AU house price index; AU RBA decision; EU German factory orders;
8 May: NZ RBNZ FSR; CH trade balance; EU German IP; US Fed’s Stein speaks;
9 May: NZ HLFS; CH CPI; AU employment; UK BoE meeting, and industrial & manufacturing production;
10 May: AU RBA SoMP; G7 finance ministers/central bankers meet; US Fed’s Evans, Bernanke, and George speak.
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