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Unexpected remarks from RBA governor Stevens provided real kick in the guts

Currencies
Unexpected remarks from RBA governor Stevens provided real kick in the guts

By Mike Jones

NZD

The NZD remains side-lined, with all eyes on the collapse in the AUD.

With the NZD/USD stuck in a 0.7700-0.7790 range, and the AUD/USD sliding to the lowest level since September 2010, NZD/AUD has been propelled to fresh 5-year highs above 0.8570.

The AUD’s woes began yesterday with the soft retail sales report for May (0.1%m/m, with downward revisions to Apr and Mar). But it was some unexpected remarks from RBA governor Stevens that provided the real kick in the guts.

Stevens said the RBA board “had deliberated for a very long time” about potentially cutting rates on Tuesday.

Some media outlets have suggested the comment has been misinterpreted. This may well be the case, but Stevens will be more than happy with the AUD reaction it has delivered.

Australian OIS markets have increased their pricing of another rate cut in August to 60%.

The associated reduction in the Aussie’s interest rate advantage knocked the AUD/USD down to an overnight low of 0.9050.

Selling from custodial accounts and speculative players adding to shorts did most of the damage.

Fuelled by the AUD’s demise, NZD/AUD has soared around a cent over the past 24 hours, to around 0.8570.

According to our short-term valuation model, fundamental ‘fair-value’ is estimated in a 0.8250-0.8450 range.

However, we wouldn’t be surprised if the uptrend continues to run ahead of fundamentals, as positive momentum and speculative buying speeds it along.

In our latest Global FX Strategist, we suggested entering a NZD/AUD long position at 0.8460, targeting 0.8700 in Q3.

Looking ahead, today’s trading session is shaping up as a fairly quiet one for the NZD. Not only are US markets closed for the 4 July holiday, but investors are likely to stick to the side-lines ahead of tonight’s central bank meetings (ECB and Bank of England – no change in policy expected from either) and Friday’s US employment report.

The now familiar 0.7700-0.7790 range should continue to contain the currency. The only local economic data due for release is Australian building permits at 1:30pm (NZT). The market expects a 1%m/m fall for the May data.

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Majors

Encouraging news on the US labour market has rescued the mood this morning, after a fairly downbeat European session.

Currency performance is something of a mixed bag, with idiosyncratic factors pulling the majors in difference directions.

The GBP is the clear outperformer, with the AUD by far the biggest loser. The USD, meanwhile, is broadly weaker, largely a reflection of EUR and GBP buying.

Political turmoil in Portugal, the on-going impasse in Greece’s latest funding debate, and deepening political unrest in Egypt driving oil prices back above US$100/barrel all conspired to dampen the mood in Europe overnight.

A mostly disappointing round of June service sector PMIs only reinforced the general ‘risk-off’ sentiment. Equity markets in Europe have back-peddled to the tune of 1.0-1.6%, with Spanish, Italian, and Portuguese bond yields all climbing worryingly higher.

Still, worsening European sentiment hasn’t yet taken a noticeable toll on the EUR. After slipping to almost 1.2930 in London trade, the EUR/USD has bounced all the way back to 1.3000.

This bounce looks to be all about profit-taking, with spec investors wary of running shorts into tonight’s ECB meeting.

Our London colleagues are expecting a quick resolution to the disagreements over Greece’s €8.1bn bail-out tranche. However, the Portuguese situation may deteriorate before it gets better and fresh elections cannot be ruled out.

Should ECB President Draghi maintain a dovish tack tonight (talking up non-conventional policies), the stage may be set for the EUR to head lower and more fully reflect the recent tick-up in peripheral yields.

We continue to hold a negative EUR bias, expecting a slide to 1.2700 in Q3.

There was something of an abrupt turnaround in investors’ mood through the New York session.

After opening lower, US stocks have rallied back to around flat (S&P500 +0.08%) and the VIX index (a proxy for risk aversion) fell from above 17.0 to around 16.2. Much of this appears to be driving off building optimism over Friday’s US non-farm payrolls data.

Not only did the June ADP employment report comfortably exceed expectations overnight (188k vs. 160k expected), but the employment component of ISM non-manufacturing index rose to its best level since February.

UK economic data appear to be turning for the better. Overnight, a jump in the UK PMI services index (to 56.9 vs. 54.5 expected) encouraged a sharp paring of GBP shorts.

The GBP/USD leapt nearly 1.5 cents from 1.5150 to 1.5290. We released a sell EUR/GBP trade idea yesterday, looking to capitalise on the UK’s nascent economic improvement.  We entered at 0.8585, and target 0.8410.

Other News:

*US jobless claims continue to fall (343k vs. 345k expected).

*Headline ISM non-manufacturing index disappoints (52.2 vs. 54.0 expected).

Event Calendar:

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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