by Mike Jones
At around 0.8100, the NZD/USD opens the week threatening to break out of the 0.7690-0.8130 range that has contained it for the past three months.
This follows another week of general NZD outperformance (notwithstanding Friday’s brief earthquake-driven dip).
Last week’s local economic data (consumer confidence, retail sales, house sales, and manufacturing PMI) showed the NZ economy is on the verge of taking off. Above-trend GDP growth this year looks increasingly to be the risk.
Markets have been quick to respond by pricing more and more tightening into the interest rate curve. And widening NZ-US interest rate differentials seem to be pulling in more NZD demand from offshore yield chasers. NZ-US 3-year swap differentials last week hit 300bps – the highest level since August 2011 (when the NZD/USD was around 0.8400).
Still, last week’s gains in US bond yields, should they continue, may well limit further widening in NZ-US interest rate differentials.
The key directional influence on this front this week will be Thursday morning’s FOMC minutes. The minutes’ influence on the expected timing of Fed ‘tapering’ promises to be the key driver of currency markets this week.
In the Asian time zone, the August ‘Flash’ Chinese PMI (Thursday) and Tuesday’s RBA minutes will be the key market moving events. China’s PMI will likely be NZD positive if it improves along the lines the market expects. The RBA minutes, meanwhile, might receive less attention than usual given the Statement on Monetary Policy has already been published.
None of this week’s NZ data are likely to be particularly exciting for markets. Still, we’ll be keeping an eye on Wednesday morning’s dairy price auction and today’s BNZ-Business NZ (July) PSI to see if it can match the booming PMI result of the month.
According to our momentum model, NZD/USD momentum flipped from neutral to positive on the pop above 0.8100. A convincing break above the key 0.8130 resistance level would pave the way for a bounce back to 0.8250. Near-term support should kick in around 0.8070.
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Majors
Currency markets saw out the end of last week in fairly listless fashion. The USD and the other major currencies basically flat-lined.
The greenback suffered a small set-back following an underwhelming August print of the University of Michigan consumer confidence index. The headline index slipped from 85.1 to a four month low of 80.0 (85.2 expected). But with US 10-year bond yields climbing to another fresh cycle high (2.86%) later in the night, the USD managed to avoid any lasting fallout.
Unsubstantiated rumours of regulatory changes to the Chinese banking sector saw the Shanghai index briefly jump 6%. The NZD and AUD surged. Despite a quick reversal of the China gains, the NZD and AUD nevertheless managed to hold theirs, ending the Friday session as joint outperformers.
IMM data released on Friday revealed the speculative community trimmed USD longs in the week ending 13 August. The number of net USD long positions fell from 184k to 147k. The AUD and the EUR were the biggest beneficiaries of such, with net shorts in the former falling to 62.7k (from 76.8k) and net longs in the latter increasing to 16.1k (from 6.1k).
With speculative positioning in the USD a little more balanced, there is increased potential for a broad USD rally should this week’s FOMC minutes reaffirm market expectations for a September taper. The minutes stand out as the highlight of an otherwise fairly quiet week.
Other key data and events include Chinese and European flash PMIs for August (Thursday), the RBA Board minutes (Tuesday), and the Jackson Hole central bankers meeting (22-24 August). China’s PMI should bounce back from July’s surprise weakness, but the European PMIs may struggle to achieve investors’ lofty expectations (50.7 expected, from 50.3 last month). This perhaps tilts the risks around the EUR/USD to the downside this week. Resistance around 1.3400 looks very solid.While Jackson Hole has been market moving in the past, an absence of top tier speakers means it may well be ignored by the markets this year. Overall, we hold a mild upside bias for the USD this week.
Other news: *Chinese home prices rise in 69 of 70 cities in July. Beijing and Shanghai rise 14%y/y.
Event Calendar:
19 August: NZ PSI; NZ PPIs; UK house prices; JN trade balance;
20 August: AU RBA minutes; AU RBA minutes; US Chicago Fed;
21 August: NZ migration; NZ credit card spending; UK public sector borrowing; US home sales;
22 August: CH HSBC Flash PMI; EU Flash PMIs; US jobless claims; US house prices; US Jackson Hole Summit;
23 August: EU German GDP; UK GDP; US new home sales.
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