by Mike Jones
The NZD/USD has felt the pinch of broad strengthening in the USD overnight.
At around 0.7875, the currency now trades just over a cent below the post-FOMC highs of yesterday morning.
A buoyant night in equity and commodity markets hasn’t been enough to rescue the NZD.
The greenback has been the star performer as a string of strong US data restored faith in Fed tapering (hot on the heels of the FOMC-inspired nervousness of yesterday).
Surging US interest rates have taken the edge off the NZD’s interest rate differential, cooling NZD demand from yield chasers. NZ-US 3-year swap differentials slipped from 292bps to 285bps.
A bout of profit-taking in NZD/AUD has also weighed on the NZD. Selling from speculative and leveraged accounts keen to trim short AUD exposures has seen the cross ease from above 0.8900 to around 0.8820.
For technical traders, the clear rejection of 0.8900 means a deeper pullback to 0.8780 support now looks likely before we see another crack at the topside.
Local markets should see out the end of the week in fairly quiet fashion, with just Australian PPIs on the data calendar.
Tonight, it’s all about non-farm payrolls in the US. The risks here appear tilted towards a strong result (>200k?) following the upbeat ADP employment data earlier in the week.
If this proves to be the case, the headwinds from additional USD strength would likely press the NZD/USD back down into the 0.7690-0.7890 range it occupied for the early part of July.
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Majors
Upbeat global manufacturing data and confirmation that the G3 central banks are keeping the policy easing pedal to the metal have made for a buoyant night in financial markets.
Global equity markets have posted solid gains, bond yields are rising, and commodity prices are mostly higher. In currency markets, the USD has shaken off its post-FOMC blues and is higher across the board.
July manufacturing PMIs impressed no matter where you looked. China’s yesterday, and European, UK and US indices overnight all came in well above expectations.
Rising confidence in the global recovery has seen global equity markets climb 0.9-1.5%, with a 2.7% increase in oil prices leading the gains across the commodities complex.
Still, it was the US ISM manufacturing survey that has captured the most attention. The surge in the headline index to a 2-year high in July (55.4 vs. 52.0 expected) has acted to re-establish investor confidence in the Fed’s plans to taper QE later this year. The same can be said for the sharp drop in US jobless claims (326k vs. 345k expected).
The associated punchy gains in US bond yields have seen the USD bounce back from its FOMC-driven losses. USD gains range from 0.5% against the AUD & GBP, to 1.5% against the JPY. The CAD and EUR are sitting mid-pack.
Admittedly, a dovish-sounding ECB has helped the USD’s cause, keeping the EUR on the back foot even before the ISM survey’s release. The forward guidance introduced at the last meeting was repeated ("key rates to remain at current level or lower for an extended period of time") and President Draghi warned current market expectations for interest rate hikes are unwarranted.
Having shown signs of breaking above 1.3300 yesterday, a key reversal in the EUR/USD has it opening at 1.3220 this morning.
Whether the USD can continue to outperform is now all down to tonight’s employment data. Formal expectations for July non-farm payrolls sit at a 185k, but the whisper number is likely to be slightly higher following the positive ADP report.
We suspect a jobs result of 170k or better (keeping the year-to-date average around 200k) would be enough be keep the Fed on course to taper in September, thereby lending support to US bond yields and the greenback.
Other news:
*Italy’s Supreme Court rejects Berlusconi’s appeal against a conviction for tax fraud, upholding a four-year jail term.
*ECB leaves both main refi rate and deposit facility rate unchanged (at 0.50% and 0.0% respectively).
*BoE keeps asset purchases and interest rates unchanged.
Event Calendar:
2 August: US non-farm payrolls; US factory orders; US Fed’s Bullard speaks.
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