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Steep decline in Nikkei kick-started ‘risk-off’ tone and sees NZ$ and A$ both weaker; Japan's share market down more than 8.5% since 19 July

Currencies
Steep decline in Nikkei kick-started ‘risk-off’ tone and sees NZ$ and A$ both weaker; Japan's share market down more than 8.5% since 19 July

by Mike Jones

It’s been a stuttering start to the week for the NZD. Unable to build on last week’s outperformance, the kiwi slipped to the bottom of the currency performance rankings overnight.

The NZD/USD shed around ½ cent late in the offshore session, and opens this morning around 0.8025.

A solid set of US home sales figures helped blow a bit of wind into the USD’s sails. Still, it was a stronger JPY that did most of the damage to the kiwi. NZD/JPY skidded from 79.30 to closer to 78.50, weighing on the NZD more generally.

We wouldn’t rule out a re-test of 76.70 support in the current bout of generalised JPY strength. But we still expect a bounce back above 80.00 for the NZD/JPY later in the year.

Not only are Japan’s external accounts expected to deteriorate, but we suspect the Bank of Japan will be forced back into policy easing.

The key directional driver for the NZD/USD this week will be general USD sentiment, and in particular how this week’s swathe of US (and global) event risk tilts the Fed tapering debate.

Any one of this week’s heavy weight global data releases could prove to be influential here.

However, its Friday’s US non-farm payrolls which will once again be the show stopper. We suspect a jobs result of 160k or better (keeping the year-to-date average around 200k) would be enough be keep the Fed on course to taper in September, thereby limiting any further losses in the USD and US bond yields.

For the NZD/USD, the upshot is while the bounce may extend in the near-term, a steady USD should cap gains to around 0.8300 (the top of our model’s short-term ‘fair-value’ range).

Near-term, the NZD/USD’s repeated rejection of 0.8100 sets the currency up for move back towards support at 0.7900. However, there is some local event risk to watch out for today. We’re expecting something of a pull-back in today’s (June) residential building consent figures, after strong readings in April and May (due 10:45am).

Across the Tasman, there’s Australian building permits data to monitor (1:30pm, market expectations +2.0%m/m), but there will be much more interest in a speech from RBA Governor Stevens to the Anika Foundation at 3:05pm (NZT). This address has in the past proved to be market moving.

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Majors

Financial markets adopted a more cautious tone overnight, as investors nervously await a tidal wave of important data and events later in the week. ‘Safe-haven’ currencies like the USD and JPY were the key beneficiaries of the more cautious mood.

Another steep decline in the Nikkei kick-started the ‘risk-off’ tone. Yesterday’s 3.3% decline means the Nikkei has now fallen more than 8.5% since 19 July. Most of this seems to have been driven off the strengthening JPY (USD/JPY fell to a fresh one month low below 97.70 overnight). But BoJ Governor Kuroda yesterday throwing his support behind a Japanese sales tax hike didn’t help matters.

Following Asia’s lead, US stocks are down 0.2-0.3% overnight, despite a slew of M&A announcements. The VIX index (a proxy for risk aversion) climbed from 12.7 to around 13.6.

The mood across the Atlantic held up slightly better, thanks in part to an improved reading on Italian business confidence, and a successful Italian bill auction.

Late in the session, a set of less downbeat-than-expected US home sales figures (-0.4%m/m vs. -1.0% expected, 9.1%y/y) added support to the greenback. Price action in the majors was nonetheless fairly subdued, with the NZD/USD and AUD/USD bearing most of the brunt of the firmer USD (each shedding around ½ cent).

Looking ahead, most of the action looks set to take place in the latter half of this week, with the FOMC meeting, global manufacturing PMIs, BoE & ECB meetings, and US non-farm payrolls all due on either Thursday or Friday. Until then, we suspect currencies will continue to chop about inside narrow ranges.

The EUR/USD looks well entrenched inside 1.3220-1.3300, with the USD index likely to keeping bouncing around between 81.85 resistance and support at the 81.50 200-day moving average. For today, RBA Governor Stevens’ speech is the only notable piece of event risk.

Event Calendar:

30 July: NZ building permits; JN jobless rate; AU building approvals; AU RBA Governor Stevens speaks;

31 July: NZ ANZ business confidence; AU credit growth; US ADP employment; US Q2 GDP; US FOMC decision;

1 August: CH manufacturing PMI; CH HSBC manufacturing PMI; AU new home sales; EU manufacturing PMIs; UK BoE meeting; EU ECB meeting; US ISM manufacturing;

2 August: US non-farm payrolls; US factory orders; US Fed’s Bullard speaks.

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