By Mike Jones
NZD
Last week was all about consolidation for the NZD.
A thawing in the Chinese liquidity freeze and steady NZD/AUD buying helped ease the downward pressure on the NZD/USD.
But the headwinds from a strengthening greenback ensured any gains were limited to around 0.7850. Still, this sideways creep was good enough to earn the NZD the title of strongest performing currency over the week.
Friday night was a fairly choppy and listless one for currency markets. Month/quarter end portfolio rebalancing and hedge-related FX fixing flows dominated the session.
Heavy real money selling of the AUD and NZD at the fix pushed the NZD/USD down to an overnight low of around 0.7710 (before closing the week around 0.7740).
The release of the latest IMM speculative positioning data on Friday showed the speculative community (as of last Tuesday) is now holding a net short position in the NZD for the first time in 12 months.
Speculators have held net shorts in the NZD on only four previous occasions since 2006. In each of these, the NZD/USD has rallied strongly in subsequent weeks.
We revised down our NZD/USD forecasts on Friday (see here), but identified upside risks from speculative positioning and supportive domestic ‘fundamentals’.
The latest update of our new short-term valuation model shows NZD/USD ‘fair-value’ has declined 4 cents over the past month, to 0.7750-0.8150. The fact the currency is now approaching the bottom-end of this range suggests caution in expecting further sharp falls.
For this week, general sentiment towards the USD will remain the key source of direction for the NZD/USD. This is particularly so given the importance and focus on this week’s key US employment and manufacturing data.
Outside of the US, tomorrow’s RBA meeting and today’s Chinese PMI manufacturing data (from 1pm NZT) will also be worth keeping an eye on for NZD watchers.
We expect the RBA to keep its cash rate steady at 2.75% and retain its easing bias. This sort of outcome would be unlikely to ruffle the feathers of the AUD or NZD.
New Zealand’s data diary is relatively light this week. Still, it will be interesting to see how NZ’s commodity export prices have fared of late. We’re expecting a 1.6% decline in the world price component of Tuesday’s ANZ commodity price index. We also hold a small negative bias for Wednesday’s GDT dairy auction.
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Majors
Quarter-end portfolio rebalancing and fixing flows made for a choppy session on Friday. Towards the end of the night, the trend for a stronger USD returned. The DXY index closed 0.3% higher.
Fundamental support for the USD came from FOMC Board member Stein and (FOMC non-voting hawk) Lacker, who both gave succour to the notion of QE tapering commencing in September.
This had the effect of pushing Treasury yields back higher (10-year yields ended the session around 2.49%). Equity markets were mixed, with European stocks lower and US stocks either flat (in the case of the Nasdaq) or down slightly.
As with most of last week, the low-yielding JPY bore most of the brunt of the stronger USD (although AUD was the weakest performer).
The return of the USD/JPY onto a 99 handle on Friday (low of 93.85 in mid-June) may encourage the spec community to launch another assault on 100 this week, although we suspect we’ll need US data to play ball as well.
We’re in for a busy week on that score, bookended by the US manufacturing ISM tonight and non-farm payrolls on Friday.
US factory orders and the ISM non-manufacturing index will be the mid-week highlights. Not to be outdone, Europe has June (final) PMIs, CPI, and retail sales to monitor.
In Asia, today’s Japanese Tankan survey will probably be overlooked in favour of the ‘official’ and HSBC editions of the Chinese PMI (for June).
Central banks also loom large this week, although we doubt any of them will alter their policy stances.
It’s the first Bank of England meeting under new governor Carney, but the BoE’s policy of not issuing a statement on a “no change” decision means we’ll have to wait for the minutes (17 July) to get an insight into the new governor’s thinking.
ECB chief Draghi is likely to (re)emphasise the fact EU policy is likely to remain loose for some time, and the ECB stands ready to do more if needed. We expect the RBA to sit tight.
Overall, we hold a mild downside bias for the USD this week. The market has been quick to front-run the end of FOMC QE, and the onus is now on the data to justify the move up in US bond yields and the USD.
Near-term resistance at 84.50 on the USD index will be tough to crack.
Other news:
*The Chicago PMI disappointing expectations at 51.6, down from 58.7 last month and 55.0 expected. In contrast, the final University of Michigan consumer confidence reading rose to 84.1 from a preliminary reading of 82.7 (83.0 expected).
Event Calendar:
1 July: AU PMI; JN Tankan; CH PMI (official and HSBC); EU PMIs; UK PMI; EU CPI; US ISM manufacturing index;
2 July: NZ ANZ commodity prices; AU RBA meeting; US ISM New York; US factory orders;
3 July: CH non-manufacturing PMI; AU home sales, trade balance, and retail sales; CH HSBC services PMI; AU RBA Governor Stevens speaks; EU services PMIs; EU retail sales; US ADP employment;
4 July: JN BoJ’s Kuroda speaks; AU building approvals; UK BoE meeting; EU ECB meeting;
5 July: NZ Crown accounts; EU German factory orders; US non-farm payrolls.
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