by Mike Jones
After sliding lower in Asia yesterday, weak commodity prices and a firmer USD have kicked the NZD/USD even lower overnight. It currently trades around 0.7980, about ½ cent below levels this time yesterday.
The AUD came close to full capitulation yesterday, following an extremely dovish outburst from RBA Governor Stevens. The fact it did not fall even further probably reflects caution ahead of the large slab of global event risk about to hit markets (starting with tomorrow morning’s FOMC Statement).
Stevens signalled an August RBA rate cut is all but locked and loaded, with additional rate cuts likely to be needed. Australian rate markets have dutifully responded; an August cut is now almost fully priced, with an additional 25bps rate cut fully factored into the curve.
The associated sharp paring in the AUD/USD’s yield advantage pitched the currency from 0.9200 to almost 0.9060 yesterday.
Overnight, investors continued to lean on the AUD/USD (and NZD/USD), with soft commodity prices and a firmer USD encouraging speculative investors to re-establish short positions.
While the NZD/USD has felt some of the impact of the tumbling AUD, the AUD’s misfortunes have mostly been reflected in a higher NZD/AUD, as investors continue to play up the policy differences of the antipodeans. The cross notched up fresh 5-year highs above 0.8800 yesterday.
We doubt today’s data and events will do much to slow down the ascent of the NZD/AUD (even if it is closing in on our year-end 0.8900 forecast well ahead of time). We’ll be watching the newswires for an update on Fonterra’s milk price.
An upwards revision to the already elevated $7 per kg/ms is expected. We’ll also get the July ANZ business confidence index at 1pm (NZT). The various confidence measures should remain in good heart, and consistent with above trend growth in NZ.
Offshore, investors are on tenterhooks ahead of tonight’s US GDP/FOMC meeting double-act (with ADP employment data thrown in for good measure). Our assessment is that there is mild upside risk to the USD going into these events.
Overall, we’re left with a negative bias for AUD/USD and NZD/USD on the day, but more so on the former, meaning more gains could be in the offing for NZD/AUD. Near-term support for the NZD/USD is expected to kick in at 0.7900. Resistance is at 0.8105.
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Majors
Currency markets are still playing the waiting game ahead of the potentially game-changing event risk later in the week. Most of the major currencies tracked tight ranges overnight, albeit with a slight bias to push the USD higher.
Not only was there a lack of top tier data to provide direction for currencies, but global equity markets are similarly becalmed. The major equity indices in Europe and the US are barely changed from yesterday. Commodity prices are generally lower.
The USD managed to brush aside some weaker consumer confidence data, finding support instead from chatter about a proposed tax change on overseas earnings perhaps increasing USD repatriation.
As a result, the EUR/USD again failed to push through resistance at 1.3300, and eventually dribbled off to around 1.3250. A heavier toll was taken on GBP/USD, which gave up close to a cent during London trading hours (1.5240 currently). The NZD/USD and AUD/USD, meanwhile, pushed even farther south.
Looking ahead, the coming 24 hours in markets will be all about month-end, Q2 US GDP, and the FOMC meeting tomorrow morning (6am NZT). End-of-month portfolio rebalancing looks set to weigh on the USD, but the reaction to the latter two events will likely swamp this effect.
US GDP is expected to print no better than about 1%, but we doubt this will sway the Fed from staying the course (the fiscal-led Q2 slowdown has likely been already factored into Fed forecasts).
Our sense is that the Fed Statement will not differ markedly from one issued on June 19. In between Statements, of course, markets have felt the impact of last week’s dovish-sounding article from ‘Fed-watcher’ Hilserath.
Given this, we might expect US bond yields to lift slightly and the USD to rally if indeed the FOMC’s language is little changed tomorrow morning.
Other News:
PBOC pumps RMB17b (US$ 2.8b) into the money market via 7-day repos, the first such liqduity injection since Feb 7.
Event Calendar:
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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