by Mike Jones
The NZD has recouped nearly all of its Monday morning losses over the past 24 hours. The NZD/USD and NZD/AUD are currently trading at 0.7810 and 0.8760, respectively – pretty close to where they were prior to the weekend’s “dirty pipe” news.
Confirmation from Fonterra that China has not imposed a blanket ban on NZ dairy products has been behind the NZD’s bounce.
Indeed, it seems China has banned only a few NZ export products – whey powder and dairy base powder. Skim and wholemilk powder, which make up the vast majority of NZ dairy exports to China, are not subject to the ban.
We said yesterday that the NZD was likely to bounce at some point, following Monday morning’s pounding. But the speed at which it has recovered has surprised even us.
The NZD is not out of the woods yet though. The speculative community remain keen sellers of NZD/USD rallies above 0.7815.
What’s more, market chatter suggests offshore players are now looking towards Wednesday morning’s GDT dairy auction as a key test of sentiment towards NZ dairy products (even though none of the products offered on the GDT platform have been affected by contamination issues). A decent fall in auction prices (≥5%) would likely trigger a fresh wave of NZD/USD selling.
For today, we can expect investors’ attention to shift off the NZD and towards the AUD. After a few dribs and drabs of Aussie data at 1:30pm NZT (trade balance, house prices, and job ads), all eyes will be on the RBA as it delivers its latest policy decision at 4:30pm.
Economists unanimously expect the cash rate to be cut 25bps to 2.5%. OIS markets are 90% priced for such.
Assuming a cut is delivered, the tone of the accompanying statement will be key to the AUD (and NZD/AUD) reaction. Talk about a 2% cash rate next year has been behind some of the AUD’s recent weakness, and a further 25bps easing later in the year is already priced into the curve.
So we’ll need to see the RBA strike an extremely dovish tone to engineer further falls in the AUD (and gains in NZD/AUD). This remains a distinct possibility following Governor Stevens’ ‘game-changing’ speech of last week.
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Majors
Currency markets drifted overnight. Post-payrolls fatigue, and thinning volumes as European holidays begin, saw most of the major currencies consolidate in sideways ranges.
Generally upbeat global service sector data had relatively little impact on the markets. Equity markets and most commodity price indices traded pretty close to flat. US bond yields did receive a boost from the US ISM non-manufacturing index, but there was no real follow-through to the USD. 10-year Treasury yields ended the night 5bps higher around 2.64%.
One of the biggest movers of the night was the GBP, as further evidence of UK economic ‘green shots’ emerged.
According to the services PMI, UK service sector activity increased at its fastest pace since December 2006 in July (60.2 vs. 57.4 expected). In response, GBP/USD climbed from 1.5260 to almost 1.5380, before settling a little lower. Real money appetite to sell EUR/GBP, NZD/GBP, and AUD/GBP was also a feature of the night.
Looking ahead, the GBP may be vulnerable to the BoE clarifying triggers for ‘forward guidance’ at this week’s Inflation Report (Wednesday). But we are still growing more upbeat on GBP and may look to enter a fresh short EUR/GBP position in coming days. If UK economic momentum continues to impress, we’d expect 0.8470 support to be tested before long (spot currently 0.8635).
Other news:
*European composite July services PMI prints a smidge above expectations (49.8 vs. 49.6 expected), with a disappointing outturn in Germany (51.3) being offset by stronger-than-expected results for Italy (48.7) and France (48.6).
*Eurozone retail sales prints at -0.5%m/m vs. -0.7% expected.
*US ISM non-manufacturing index jumps to a five-month high of 56.0 in July (from 52.2 in June and against expectations of 53.1), bolstering the US economic recovery story.
Event Calendar:
6 August: AU trade balance; AU house prices; AU RBA decision; EU German factory orders; US Fed’s Evans speaks;
7 August: NZ HLFS and LCI labour data; AU home loans; UK BoE inflation report; EU German industrial production; US Fed’s Pianalto speaks;
8 August: AU employment; CH trade balance; JN BoJ decision; US jobless claims;
9 August: NZ ECT data; AU RBA SoMP; CH CPI, PPI, retail sales, and industrial production.
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