By Mike Jones
NZD
A resurgent USD sliced almost 1.5 cents off the NZD/USD on Friday night. As a result, the currency is opening the week close to the bottom of the 0.7685-0.7850 range that has contained it over the past 3½ weeks.
Friday’s upbeat US payrolls data breathed new life into the greenback, as US interest rates surged across the board.
The NZD/USD was one the biggest casualties, sliding 1.6%. However, over the week, the kiwi retained its title of the strongest performing G10 currency.
According to our short-term valuation model, NZD/USD ‘fair-value’ has remained steady over the past week, at 0.7750-0.8150.
However, negative momentum, a bearish technical picture, and increasingly positive USD sentiment means we wouldn’t be surprised to see the NZD/USD continue to track below ‘fair-value’ in the short-term.
A convincing break below range-bottom support at 0.7685 would likely trigger another wave of selling.
The biggest impediment to further downside progress is probably the positioning of the speculative community. This is already heavily skewed towards expecting further weakness.
Ultimately, speculators’ net short NZD position will have to be (at least partially) squared up. We suspect the catalyst for such is more likely to come from the US, than NZ, where exchange rate ‘fundamentals’ are already fairly positive.
More evidence of this is likely to come from this week’s NZ data. We expect Tuesday’s Quarterly Survey of Business Opinion (QSBO) to strengthen regards growth and signal tightening regards capacity - we’re just not sure of the extent.
Tuesday also delivers June’s electronic card transactions – for which we’re picking a 0.3% increase.
Finally, Thursday’s PMI will struggle to hold May’s huge level of 59.2 but, presumably, will remain stoutly positive.
Elsewhere in Asia, the two events with most relevance for the NZD will be China trade data for June (Wednesday) and Australian employment data (Thursday).
In contrast, the Bank of Japan meeting (Thursday) should prove to be a damp squib for NZD/JPY.
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Majors
Last week’s trend for a stronger USD kicked up a gear on Friday following June US non-farm payrolls data.
The static 7.6% US unemployment rate evidently failed to detract from what was otherwise an unequivocally strong non-farm payrolls report.
Not only was the 195k headline rise in jobs well above 165k expected, but there was 70k worth of upward revisions to April and May data.
The small increase in the participation rate was also positive, and helps explain the lack of movement in the unemployment rate.
In the market’s eyes, the upbeat labour data simply reinforced the likelihood that September is now the start date of QE ‘tapering’. The bond, equity, and currency market reaction was everything one would have expected.
US stocks rallied (S&P500 up 1.02%). Treasury yields punched through their previous highs (10-year from 2.55% to close at 2.73%), further bolstering fundamental support for the USD.
The stronger USD saw all of the major currencies pressed lower, with the NZD and GBP faring the worst (down 1.6% and 1.2%) and CAD and EUR the best (down 0.6% and 0.7%).
The week ahead is noticeably quieter than last week as far as scheduled data and events go. Investors’ focus will remain on the US, with the FOMC Minutes due on Wednesday, and a long line of Fed speakers, most notably chairman Bernanke on Wed, set to provide an update on their views.
The second quarter US earnings season also begins this week, with Alcoa reporting after the bell tonight.
There is a risk that the latest spike higher in US yields elicits some pushback from the Fed’s doves. However, with the hard data increasingly pointing in the right direction, we doubt the market will react much to any attempt to talk yields lower.
Near-term pullbacks in the USD are likely to continue to be met with buying interest from speculative and leveraged accounts, and the uptrend should remain in place this week. In the near-term, dips in the USD index should be limited to support at 83.60.
Outside of the US, we expect the BoJ will remain on hold at Thursday’s meeting, citing the recent improvement in Japanese data.
In Europe, eurogroup meetings at the start of the week will focus on the release of the 8th aid installment to Greece.
Event Calendar:
8 July: AU jobs ads; EU German IP; EU Eurogroup meeting;
9 July: NZ QSBO; NZ ECT data; NZ house prices; AU NAB business confidence; CH CPI; UK manufacturing production;
10 July: AU consumer confidence; CH trade balance; AU RBA Assistant Governor Debelle speaks; US FOMC minutes; US Fed’s Bernanke speaks;
11 July: NZ PMI; NZ food prices; AU employment; JN BoJ; US jobless claims;
12 July: US Michigan consumer confidence; Fed’s Plosser & Bullard speak
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