USD will remain on the front foot, as it continues to benefit from rising yields and snippets of ‘safe-haven’ demand

by Mike Jones

The NZD has finished the night around the middle of the overnight FX performance rankings.

While position liquidation in the emerging markets remains a weight on the NZD, additional signs of stabilisation in Chinese growth have exerted a positive influence on the currency.

The net of these factors saw the NZD/USD track a mostly sideways 0.7810-0.7865 range overnight.

In contrast, NZD/AUD remains under pressure.

Yesterday’s encouraging Chinese Flash PMI (50.1 vs. 48.2 expected) has tended to benefit the AUD more than the NZD.

Indeed, the AUD/USD was pitched back above 0.9000 overnight as speculative players were forced to take back a few stale short positions.

AUD outperformance, along with sporadic NZD selling from Asian real money accounts, squeezed the NZD/AUD as low as 0.8660 overnight.

It’s now more than two figures below the July 0.8900 highs.

Worth noting is the fact our momentum model has now cut the NZD/AUD long position it’s had in place since 19 June.

Fundamentally, our view hasn’t changed and we look for a return to the 0.8900 highs in time.

But, near-term, with momentum neutral and short covering buoying the AUD, we could see the cross spend some time in a lower 0.8600-0.8800 range. Fundamental ‘fair-value’, according to our short-term valuation model, is 0.8400-0.8600.

There’s no Australasian data to watch for today. Focus for the NZD will remain in Asia in any case, with additional weakness in the likes of INR, IDR, KRW, and MYR likely to see the overnight NZD/USD lows around 0.7810 tested again today.

Bounces should be limited to around 0.7880 on the day.

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Majors

It’s been another mixed and choppy night for the major currencies. The USD flew around wildly in an 81.35-81.70 range, before finishing up pretty close to where it started the night. 

While the vicious sell-off in emerging market currencies (INR -0.9%, IDR-0.9%, KRW-0.5%) remains a focus for many, a string of upbeat global manufacturing data helped limit the broader fallout.

Indeed, after a slightly less negative Asian session (Nikkei -0.4%, Shanghai composite -0.3%), European stocks have posted solid gains of 0.8-1.4%. The US S&P500, meanwhile, is up around 0.7% after US data mostly met expectations (jobless claims, house prices and Markit preliminary PMI). The VIX index (a proxy for risk aversion) fell from 16% to below 15% and commodity prices have mostly pusher higher (oil prices +1.1%).

Yesterday’s Chinese Flash PMI suggested Chinese growth is stabilising around the government’s 7.5%y/y target. And overnight, the euro area PMIs also helped buoy sentiment towards the global economy. The headline EU manufacturing PMI beat expectations (51.3 vs. 50.7 expected), and points to growth of around 1%q/q in Q3.

In currency markets, the solid EU PMIs have broadly translated into EUR outperformance with EUR/USD creeping higher through most of the night (1.3350 currently). USD/JPY also remains perky as 10-year US Treasury yields continue their slow assault on 3.00% (2.9% currently, up from 2.8% prior to yesterday’s FOMC minutes). GBP/USD, in contrast, has been weighed down by comments from the BoE’s Weale that additional quantitative easing in the UK may yet be required. GBP/USD has slipped from 1.5640 to around 1.5580 amid widespread selling of GBP crosses (EUR/GBP from 0.8530 to 0.8570).  

For today, we can expect some attention on US data, with a pull-back expected in both durable goods orders and new home sales. Absent a large miss from these data, we suspect the USD will remain on the front foot, as it continues to benefit from rising yields and snippets of ‘safe-haven’ demand. A close above the 81.60 200-day m.a for the USD index would be a bullish signal. The second estimates of Q2 GDP in the UK and Germany are expected to be left at 0.6% and 0.7%, respectively.

Other news:
*US jobless claims 336k vs. 330k expected.
*US house prices rise 0.7%m/m in June (0.6% expected).
* US Markit preliminary manufacturing PMI 53.9 (54.2 expected).

Event Calendar: 
23 August: EU German GDP; UK GDP; US new home sales; US durable goods orders.

All its research is available here.