By Mike Jones
NZD
NZD sentiment has recovered sharply over the past 24 hours. The NZD/USD has bounced from 0.8080 to 0.8180, taking out the title of strongest performing G10 currency in the process.
As with the past couple of weeks’ worth of NZD declines, the overnight lift in the currency has mostly been a USD story.
An about-turn in the USD/JPY yesterday kick-started a broader bout of profit taking on USD long positions (which had reached ‘extreme’ levels). Most of the major currencies have been jolted higher as a result.
The NZD also likely drew some support from yesterday’s Performance of Services Index. The April PSI lifted to 56.1, from an already strong 55.6. This follows the positivity in its Manufacturing counterpart released last week.
Combined, these surveys illustrate a decent underlying economic growth pulse at present. We expect the ongoing outperformance of the NZ economy to keep the NZD/USD on an uptrend for all of 2013.
There’s a smattering of local data to keep an eye on today, with the Q2 RBNZ inflation expectations survey, and April migration and credit card spending figures all due.
Of these, the inflation expectations data, in particular the two-year ahead measure, promises to be the most interesting (released 3pm NZT). We’ll be intrigued to see whether it eases from Q1’s elevated 2.2%y/y reading.
However, this afternoon’s RBA minutes may well be more important for the NZD (1:30 NZT). Investors will be scouring them for any hints a follow-up (June) rate cut is on the cards.
The Aussie OIS market is currently only pricing around a 20% chance of such, so there is certainly room for the AUD (and by association the NZD) to suffer on any unexpected RBA dovishness.
As we noted yesterday, our short-term valuation model suggests NZD/AUD ‘fair-value’ ratcheted up again last week. But the estimated 0.8100-0.8300 fair-value range still leaves the cross looking a smidge ‘expensive’ on current fundamentals.
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Majors
Low volumes and a dearth of economic data have conspired to produce a quiet start to the week in currency markets. The most notable development has been a clear reversal in last week’s trend for a stronger USD.
Led by a pull-back in USD/JPY, the greenback has weakened against all of the major currencies over the past 24 hours.
Comments from Japan’s Economics minister Amari yesterday (that the yen correction may be close to complete) sparked a flurry of profit-taking on USD/JPY long positions.
After ending last week above 103, USD/JPY has tumbled back to around 102.30. The consequent broader pullback in the USD overnight is instructive as to just how much USD/JPY is driving USD sentiment at present.
Admittedly, an encouraging reading on the Reuters Japanese Tankan survey (see below) and some dovish comments from the Fed’s Evans have helped the USD/JPY on its way lower.
Looking ahead, the strength of USD sentiment looks set to be tested again by speeches tonight by the Fed’s Bullard (neutral) and Dudley (a dove).
Any further push-back from these two on the idea of an imminent tapering of asset purchases may encourage additional profit-taking on USD longs, as investors brace for Fed Chairman Bernanke’s all important testimony on Wednesday.
A test of support around 101.90 on USD/JPY is possible, while the EUR/USD bounce could extend to around 1.2930.
Other news:
*The Reuters JP Tankan index for manufacturers climbed 11 points to 7.0 as the JPY slide bolsters exporters’ confidence.
*The Fed’s Evans says he has tried to resist talking about tapering, and the economy should reach “escape velocity” in 2014.
Event calendar:
21 May: NZ net migration; AU RBA Board minutes; NZ inflation expectations; UK PPI; US Fed’s Bullard and Dudley speak;
22 May: JN trade balance; AU consumer confidence; JN BoJ Kuroda press conference after policy meeting; UK public borrowing; US Bernanke testimony; US FOMC minutes;
23 May: CH HSBC Flash manufacturing PMI; EU Flash PMIs; UK GDP; US Fed’s Bullard speaks; US new home sales;
24 May: NZ trade balance; US durable goods orders; EU German IFO.
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