By Mike Jones
NZD
The NZD is again the strongest performing currency of the past 24 hours as fading risk aversion allows fundamentals to retake the reins as the key driver of currencies.
Against this background, no one should be surprised to see the EUR and GBP sliding back to the bottom of the currency performance rankings.
Indeed, punchy gains in NZD/EUR and NZD/GBP have been the driving factors behind the NZD/USD’s bounce back up to 0.7850 overnight.
The NZD/EUR and NZD/GBP have both strengthened close to a cent in overnight trade, to around 0.6070 and 0.5200 respectively.
The surprising actions of the Bank of England and European Central Bank have been directly responsible for the weakness in European currencies.
Both took the unprecedented step of offering ‘forward guidance’ at their policy meetings overnight in what many will see as the latest skirmish in the ‘currency wars’.
In reality, the European central banks are simply trying to disassociate themselves from the policy actions of the US Fed, and lean against the run up in global interest rates.
The gains in NZD/GBP and NZD/EUR certainly fit with our view that these currencies had got themselves a touch oversold in the recent bout of market turmoil.
And, in the absence of a resurgence in risk aversion, we can expect NZ’s superior fundamentals and the RBNZ’s more hawkish policy stance to continue to exert mild upward pressure on these currencies.
Our quarter-end forecasts are 0.5250 for NZD/GBP and 0.6150 for NZD/EUR, but upside risks abound.
Today promises to be a session of consolidation as all and sundry await tonight’s US non-farm payrolls report as the next key test of USD sentiment.
On a quiet day, the latest set of NZ Crown Financial Accounts may be of passing interest to markets. There may be some payback in these, given April’s numbers were flattered by what looked to be earlier than expected corporate tax filings.
On the day, rallies in the NZD/USD should be capped by resistance at 0.7900. Support should kick in on any dips towards 0.7760.
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Majors
Dramatic, central bank-driven, declines in GBP and EUR have been the big news of the night. While US markets were closed, the USD has been pushed higher by default as investors added to shorts in the European currencies.
The ECB and Bank of England caught investors off guard overnight. They both introduced forward guidance in their policy statements (in the BoE’s case under the direction of new governor Carney), with both statements’ language assuming a much more dovish tack.
The BoE said the recent increase in market interest rates had weighed on the UK outlook and market expectations of rate rises (in 2015) was “not warranted”.
Not to be outdone, the ECB abandoned its previous policy to “never pre-commit” to policy changes and said it “expects the key ECB interest rates to remain at present or lower levels for an extended period of time”.
What’s more, ECB chief Draghi said there had been “extensive discussion” about a possible rate cut and the ECB had “injected a downward bias to interest rates”.
The promise of additional central bank stimulus has seen European equity markets soar.
The UK FTSE is up 3.1%, the German DAX climbed 2.1%, and the French CAC 40 is up 2.9%. In currency markets, both the GBP and EUR have suffered steep declines, as investors contrast the more dovish stance of the European central banks to recent signals of QE ‘tapering’ from the US Fed.
The EUR/USD is just under a cent lower around 1.2920, while GBP/USD has given up close to two cents (currently around 1.5070).
The surprise central bank moves overnight should be viewed as attempts to counter the tightening in financial conditions stemming from recent gains in US interest rates.
With the contrast between the UK/Europe and the US becoming clearer, the risks around the GBP and EUR have probably shifted further to the downside. We’ve maintained a bearish view for a while, expecting 1.2700 in the EUR/USD, and 1.49 in the GBP/USD, by quarter end.
However, near-term direction is entirely dependent on tonight’s US non-farm payrolls report. A 165k jobs gain is expected by the market, with the unemployment rate forecast to ratchet down to 7.5% from 7.6%.
The currency reaction function to payrolls is normally to buy the USD on a ‘good’ number so we’ll likely need to see something north of 175k to maintain the selling pressure on EUR/USD and GBP/USD. Key support levels are at 1.2855 and 1.5010 respectively.
Other News:
*The IMF slashes Italy’s 2013 GDP growth forecast to -1.8%, from -1.5%. 2014 GDP growth is seen at +0.7%.
Event Calendar:
5 July: NZ Crown accounts; EU German factory orders; US non-farm payrolls.
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