By Kymberly Martin
NZD
The NZD/USD experienced quiet trading during Queen’s Birthday Monday. However, it was launched higher early this morning on the back of broad USD selling. It trades just below 0.8100 currently.
The NZD and AUD were key beneficiaries of heavy USD selling early this morning, after the release of a weaker-than-expected US ISM (see Majors).
The NZD has strengthened around 1.70% relative to the USD since the end of last week. This reinforces our view that the NZD is not now on a one-way path lower as the USD broadly strengthens.
Sentiment toward the USD will however remain a key driver of the NZD/USD this week, with the key event being Friday’s US non-farm payrolls data.
Domestic data is mostly of 2nd tier importance this week. However, important commodity price indicators will be received. We maintain a negative bias for the next (GDT) dairy auction, due early tomorrow morning.
But, only if prices drop dramatically (rather than moderately, as we expect) will they call into question the strong dairy payout forecast very recently announced by Fonterra.
Key resistance for the NZD/USD is eyed at 0.8120, while support is seen at 0.8010.
The NZD is also stronger relative to its European peers overnight, rebounding from recent declines. The NZD/EUR sits around 0.6180 currently.
The NZD/AUD has traded a path between 0.8265 and 0.8305 over the past 24-hours, sitting around 0.8290 currently. The key driver of the cross today will be the RBA meeting (4.30pm NZT).
The market still prices a small (15%) chance of a 25bps cut. We do not expect it to be delivered which could result in a knee-jerk dip in the NZD/AUD.
The pull-back in the NZD/AUD over the past week has taken the cross back towards our fundamental ‘fair value’. Over the medium-term however, we maintain a constructive view of the cross with an end-year target around 0.8700.
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Majors
The key theme overnight was USD weakness in the backdrop of a soft US ISM release. The AUD and NZD were the key beneficiaries.
Despite further heavy falls in Japanese equities yesterday, European markets and the EUR initially opened on the front foot after the release of stronger-than-expected European PMI data.
The USD then took the lead, strengthening in anticipation of the US ISM manufacturing index early this morning.
In the event, the ISM manufacturing index declined to nearly a four-year low of 49.0 in May (51.0 expected), from 50.7 previously. This suggests that weak global conditions are weighing on US producers.
But while the manufacturing sector is suffering, other sectors of the economy, particularly housing, are strengthening. This suggests risks of a recession are low even as manufacturing is contracting. But a heavy toll was taken on the USD index. It rapidly fell from close to 83.40 to almost 82.40.
US long bond yields also fell. This reinforces our core message that despite heightened talk of ‘tapering’ of US QE it will not be a one-way path higher for US bond yields and the USD. Data delivery will remain crucial.
In this regard the key risk event for the USD this week remains Friday’s US non-farm payrolls.
Overnight, all major currencies benefitted from USD selling. The EUR/USD surged from 1.2960 to above 1.3100.
The GBP had been supported earlier in the evening by the UK manufacturing PMI that came in at 51.3 (50.3 expected), a 14-month high. The GBP/USD was further boosted following the US data, trading to as high as 1.5350 early this morning.
The JPY also strengthened following the US data release. The USD/JPY broke below 100 for the first time since early May. It trades at 99.20 currently.
The AUD/USD was catapulted higher following the US data disappointment. The AUD has risen 2.0% relative to the USD since the end of last week.
The AUD/USD sits around its highs at 0.9770 this morning, as we approach today’s RBA meeting (4.30pm NZT). Our NAB colleagues expect the cash rate to remain unchanged at 2.75% for now.
The market prices a small (15%) chance of a cut today, so near-term, non-delivery could see the AUD maintain its current upward momentum.
Tonight, Eurozone PPI and US trade balance data will be delivered. Tonight, Fed members George and Fisher are scheduled to speak. They are considered to be on the neutral/hawkish side of the scales, so are unlikely to further fuel the overnight rally in US bonds.
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