US FOMC meeting and US payrolls likely to determine sentiment toward the US$ and ‘riskier’ assets such as NZ$; BoE and ECB meet with rate announcements due

by Kymberly Martin

The NZD/USD traded a tight range on Friday, ending the week at 0.8090.

The NZD, along with most of its peers, had a quiet end to the week. Ranges were relatively tight and without direction, ahead of what threatens to be a more volatile, event-driven week ahead.

Ending the week at 0.8090, the NZD/USD continues to trade close to its mid-June highs.

The NZD’s only notable move on the crosses on Friday night was relative to the JPY. The NZD/JPY traded down from around 80.00 to close the week at 79.40. The JPY strengthened against most of its peers as Japanese equity indices fell.

The week ahead is relatively light on domestic data. However, the highlight will be Wednesday’s ANZ business survey. This will likely confirm that domestic growth drivers continue to underpin the NZD.

We expect continued solid readings in areas such as confidence, own activity and firms’ employment and investment intentions.

The ultimate direction of the currency this week however, will likely be determined by offshore factors.

The mid-week US FOMC meeting, and end of week US payrolls data, will likely determine market sentiment toward the USD and ‘riskier’ assets such as the NZD.

We continue to see stiff resistance for the NZD/USD approaching the mid-June highs of 0.8140. Near-term support is seen at 0.8000.

The NZD/AUD ended Friday around 0.8730, slightly below its highs for the week. This week the cross may be influenced by comments from RBA Governor Stevens in a scheduled speech tomorrow.

We continue to see further appreciation in the cross over the medium-term with our year-end target around 0.8900. Near-term, if the market were to reduce expectations of an imminent RBA rate cut, a pull-back in the cross could result.

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Majors

It was very quiet trading within tight ranges for most currencies on Friday. The notable exception was a strong JPY.

There were few data releases of note on Friday night. The final reading for the US July University of Michigan consumer sentiment index rose to 85.1 from the 83.9 preliminary reading (84.0 expected). This revised reading was the highest since July 2007. 

However, the news failed to spur market. Equities and bonds closed little changed, likely happy to consolidate ahead of what promises to be a more volatile, event-driven week ahead.

The notable outlier amongst currencies was the strong JPY. It strengthened 1.1% relative to the USD on Friday. This was consistent with the heavy 3% decline in the Japanese Nikkei index.

The Japanese currency and equity market now have a well-established negative correlation. The USD/JPY ended the week at 98.20, its lowest level this month.

Our risk appetite index (scale 0-100%) remained at a steady 71% at the end of the week. There will be plenty to impact on broad risk appetite this week. Crucial for sentiment toward the USD and risk appetite more broadly will be Friday’s US payrolls report.

A strong report could see heightened demand for the USD, but dampened broad risk appetite, on the expectation of QE ‘tapering’ coming sooner rather then later. The report will likely supersede the impact of comments from the Fed at the FOMC meeting on Wednesday.

Ultimately the market will show greater response to data rather than words. In this regard Wednesday’s US Q2 GDP report will also be important.

Direction of European currencies this week will be influenced by meetings of the Bank of England and ECB on Thursday evening.

The BOE is widely expected to leave its cash rate unchanged (at 0.50%) and asset purchases at £375b. However, there are some rumblings that the ECB could consider a symbolic rate cut this week, although consensus expects an unchanged rate (0.50%).

The AUD/USD ended the week at 0.9260, having traded between 0.9240 and 0.9290 on the day. Significant resistance continues to be encountered approaching 0.9300. This has marked the top of the currency’s trading range for the past month.

Important for the currency this week will be a scheduled speech by RBA Governor Stevens on Tuesday. With the market now pricing a 70% chance of a cut at the RBA’s next meeting (Aug 6), all focus will be on any policy-related comments.

For today, it will be a relatively quiet start to the week, although expect a large data dump form the UK. UK consumer credit, mortgage applications, CBI reported sales and house price data will be released. Tonight, US pending homes sales data are scheduled.

All its research is available here.