by Mike Jones
Along with most of the major currencies, the NZD felt the heat of a broad strengthening in the USD overnight.
The NZD/USD slipped from 0.7830 to around 0.7775.
However, the NZD (and more so the AUD) has held up better than most, likely reflecting a break in the emerging markets currency crisis yesterday.
EM currencies stabilised yesterday after central banks in the region introduced another round of confidence-bolstering measures. Brazil and Indonesia raised interest rates 50bps and India and Indonesia reopened emergency FX swap lines. The INR and IDR bounced more than 3%, TRL was up 0.4%, while BRL and MXN posted small losses.
The NZD has been affected by the EM turbulence to the extent it can be used as a liquid proxy for the region, NZ has strong Asian trade linkages (the region accounts for 40% of our exports), and NZ (like many EM countries) has an expanding current account deficit (currently 4.8% of GDP).
But with tensions in the EM space easing yesterday, speculative players were forced to take back a few NZD short positions.
This was more noticeable in the crosses, with NZD/EUR and NZD/JPY notching up consecutive daily gains. The clear bounce off important support levels in these pairs (at 0.5790 in NZD/EUR and 75.05 in NZD/JPY) clears the way for additional gains over the next few sessions, absent another wave of EM position liquidation.
Yesterday’s local data proved inconsequential for the kiwi, reinforcing the notion direction for the currency continues to come from offshore.
RBNZ FX activity figures revealed the Bank net sold $2m NZD in July (yawn) and the ANZ business confidence survey showed activity expectations remain hot, and consistent with 5% GDP growth in NZ.
For today, local building permits figures shouldn’t trouble the currency in the absence of a huge surprise. The market expects +1.3%.
Australia has private sector credit, while Japan has a cartload of data including CPI to monitor.
Also bear in mind that China will release its ‘official’ PMI on Sunday. This should be positive (market expectations 50.6) which could set the NZD up for a strong Monday morning open.
Key support for the NZD/USD remains at 0.7690, while topside bounces should continue to be limited to 0.7850.
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Majors
USD strength was the main theme overnight, as upward revisions to US GDP figures left the market more confident Fed tapering will begin in September.
The EUR-centric DXY index is up around 0.7%.
The revisions were fairly significant.
Second quarter US GDP growth is now estimated at 2.5% (2.2% expected), from 1.7% previously.
This, alongside another fall in jobless claims overnight (331k from 336k), will leave Fed officials more confident the economy is approaching “escape velocity”. However, next Friday’s non-farm payrolls report looms as the biggest swing factor in whether tapering goes ahead in September.
US bond yields and the USD were propelled higher in the wake of the GDP report. But while US yields tailed off towards the end of the session (10-year at 2.75%), the USD has held its own.
The EUR/USD is the most obvious underperformer, sliding from 1.3340 to around 1.3240 after stops were triggered around 1.3305. CHF and SEK were dragged lower in the EUR’s wake.
In contrast, M&A chatter helped limit the losses in GBP/USD to just 0.2%. Verizon yesterday confirmed it was in talks over a possible buyout of Vodafone’s US wireless joint venture, a deal thought to be worth up to US$100 bln.
More generally, markets have continued to unwind some of the ‘worst case scenario’ pricing of earlier in the week. Not only have EM currencies managed to claw back some of their recent losses, but military action in Syria now looks a way off. A decision looks set to be delayed until next week at the earliest.
Oil prices have backed off their recent US$112/barrel peaks (currently US$109/barrel) as a result and stocks around the globe have recovered some of their early week losses. The S&P500 is up around 0.6%, following gains in most European bourses.
We noted yesterday that the USD was expected to remain in favour. This remains the case, albeit with the strength of tonight’s US data (personal spending, PCE deflator, Chicago PMI, Michigan consumer confidence, and Fed’s Bullard speaking twice) likely to test the uptrend.
However, the approach of next week’s all important non-farm payrolls is expected to keep price action fairly subdued overall.
Other news:
*German unemployment holds at 6.8% as expected, while August German CPI undershoots expectations (1.5%y/y vs. 1.7% expected).
*Fed’s Lacker reiterates the ‘tapering is not tightening’ message.
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