by Mike Jones
The NZD/USD clawed its way back above 0.8000 last night as positive fundamentals continue to reassert themselves in the wake of fading dairy concerns.
The offshore trading session has been all about a weakening in the USD. Part of this likely reflects positioning, as speculative investors trim large net longs in the greenback. But a marked recovery in risk appetite has also been a factor in the USD’s demise, as gains in equity markets and commodity prices buoy the appeal of the AUD, NZD, and CAD.
The S&P500 is currently up 0.5% while the CRB global commodity price index is around 0.7% higher.
News headlines suggesting Brazil has banned NZ dairy imports had very little discernible impact on the kiwi. The fact that Brazil takes only a very small share of NZ’s dairy exports may well have been a factor here.
Looking ahead, today’s local card spending figures (+0.6% expected by BNZ) will likely be ignored by the markets with this afternoon’s RBA Statement on Monetary Policy (SoMP, 1:30pm NZT) and Chinese price and activity data (1:30pm and 5:30pm) looming large.
The swathe of Chinese economic updates will certainly test the strength of risk sentiment and hence investor appetite for the NZD/USD.
Consensus expectations are for activity indicators (retail sales, industrial production, and investment) to broadly stabilise. But market participants will be scouring the numbers for signs of accelerating Chinese growth, the likes of which the latest PMIs and yesterday’s Chinese imports data are warning of. Any evidence of such would see the NZD/USD continue to track higher.
The AUD perma-bears will be hoping a likely downgrade of the RBA’s growth and inflation forecasts in today’s SoMP will be enough to snuff out the AUD/USD’s recent rally. The backwards looking nature of the Statement’s rhetoric leaves us a little more dubious.
For the NZD/USD, the convincing break above the 0.7900 resistance level means a further climb towards 0.8150 now looks likely. But as we’ve noted before, near-term gains should be capped at around 0.8300 as long as Fed tapering expectations remain intact.
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Majors
The USD remains firmly out of favour. The greenback continued to slide overnight, this time on the back of upbeat risk sentiment.
The simultaneous underperformance of the JPY tends to confirm a return to the risk/currencies correlations of old. ‘Growth-sensitive’ currencies like CAD, NZD, and AUD are all at the top of the overnight performance tables.
Global equity markets have notched up gains of 0.3-1.0%, commodity prices have mostly pushed higher (with the exception of energy prices), and general risk aversion indicators like the VIX index have eased.
Yesterday’s Chinese trade data kick-started the improvement in risk appetite, and offshore markets have run with this theme, aided by encouraging corporate earnings (from Rio Tinto, Deutsche Telekom, and Commerzbank amongst others).
China’s headline trade balance undershot expectations (US$17.8b vs. US$26.9b expected), with both imports (10.9%y/y) and exports (5.1%y/y) printing above market forecasts. There were clear signs in the details that Chinese domestic demand is rebounding from earlier softness. Imports for ‘domestic purposes’ accelerated by 13.9% and there was a big increase in Chinese iron ore imports (presumably from Australia).
Against this backdrop, it’s not surprising the AUD has been the star performer of the night. The AUD/USD was squeezed above 0.9100 as speculative accounts squared up shorts. Along with the NZD and CAD, the EUR/USD has also benefited from the USD’s woes, hitting two month highs of almost 1.3400.
Outside of today’s China data, there is very little left on this week’s data calendar to swing global growth perceptions and currency market sentiment.
Other News:
*BoJ keeps policy unchanged (as expected) and maintains its assessment that the economy is slowly recovering and inflation expectations are rising.
*Australian employment falls by 10.2k in July (+5k expected). Unemployment rate remains unchanged at 5.7%, thanks to a fall in the participation rate to 65.1% from 65.3%.
Event Calendar:
9 August: NZ ECT data; AU RBA SoMP; CH CPI, PPI, retail sales, and industrial production.
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