Imminent western intervention in Syria could see the NZ$/US$ climb even further

by Mike Jones

After stuttering to a 0.7730 Friday close, Sunday’s upbeat Chinese PMI has pushed the NZD/USD back up to around 0.7765 at this morning’s FX markets open.

Improving sentiment towards the Chinese economy and fading prospects for imminent western intervention in Syria may see the NZD/USD continue to recover through the early part of the week. Key will be whether support at the bottom end of the 0.7690-0.8105 range continues to hold.

However, the relative strength of this week’s string of important US data will set direction for the rest of the week.

Friday’s non-farm payrolls stands out as the potential ‘game-changer’. A positive number (≥180k jobs) would likely lock in a September Fed taper in the eyes of the market. Such a result would reintroduce downward pressure on the NZD/USD. A sub 150k result would have the opposite effect.

While payrolls is certainly the main event, the US ISM manufacturing survey and ADP employment figures will keep US markets busy in the days leading up to Friday.

Australia will also have its time in the sun, with the RBA decision on Tuesday and GDP figures on Wednesday. A ‘no-change’ decision from the former wouldn’t surprise (just a 6% chance of a 25bps cut is priced).

Key for the AUD will be whether the RBA refers to any “scope for further easing” in its commentary. The NZD/AUD has been weighed down by a fall in RBA easing expectations of late. So a re-strengthening of the RBA’s easing bias would likely see the cross dragged back up above 0.8700. Our NAB colleagues expect a below consensus 0.4% print from June quarter Aussie GDP (market 0.6%). This also skews the risks toward a NZD/AUD bounce this week.

Local data will take something of a backseat this week. Insight into Q2 NZ GDP and the latest commodity/dairy price data will be the main themes.

Today’s Overseas Trade Indexes are expected to show a big drop in Q2 export volumes, offset by a further 4.1% advance in the terms of trade.

Tomorrow’s ANZ commodity export price index is expect to rise 1%, with Wednesday morning’s GDT dairy auction to deliver a relatively steady, thus sturdy, price outcome.

According to our short-term valuation model, fundamental NZD/USD ‘fair-value’ fell around a cent last week.

The weekend’s IMM data revealed positioning in the NZD is now a little more balanced – speculators no longer hold a net short position. Meanwhile, our momentum model tells us NZD momentum will flip from neutral to negative on a pullback to 0.7721. The net of all this suggests the risks are skewed towards additional NZD downside this week. But it really all comes down to payrolls.

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Majors

USD strength was the overriding theme in currency markets last week. Friday was no exception. Month-end selling of EUR, AUD, and NZD, coupled with declines in global equities, saw the USD and its ‘safe-haven’ counterparts the CHF and JPY all outperform. Movements were not particularly dramatic though; the narrow DXY index finished the week 0.8% higher.

There were a couple of noteworthy developments for markets over the weekend. First, China’s August PMI exceeded expectations (51.0 vs. 50.6 expected). All of the sub-indices improved and the headline index is now at the highest level in 16 months. It’s another sign that growth in the Chinese economy is picking up again and, as such, should see the AUD and NZD make a solid start to the week.

Second, US President Obama announced his decision to ask Congress for approval to take military action against Syria. This looks set to delay any western response for at least 10 days. The likely knee-jerk fall in oil prices today should help restore some of investors’ risk appetite, supporting the likes of EUR, AUD, and NZD.

Looking ahead, investors are bracing for a wild ride this week. Most importantly, August US non-farm payrolls are due for release on Friday. These figures are widely regarded as the final hurdle to the Fed beginning QE tapering at the 19 September meeting. The consensus expects employment gains of 180k and an unchanged (7.4%) unemployment rate. A result on or above expectations should be enough to lock-in a September taper, and reaffirm the uptrend in US bond yields and the USD.

In contrast, a payrolls number of 150k or worse would probably see tapering expectations delayed, weighing on the USD.

Ahead of the Friday jobs numbers, the USD’s mettle will also be tested by the ISM manufacturing index, factory orders, ADP employment, and the Beige book. It’s also a big week for central banks.

Policy announcements from the RBA, BoC, Riksbank, BoE, BoJ and ECB are all due. None of them are expected to alter policy settings, but, as always, any shifts in language will be important (note also that the Fed’s Williams, Kocherlakota, Evans, and George are scheduled to speak this week).

Other News: *Friday’s batch of US data prints a little mixed with personal income (0.1%m/m) and the PCE deflator (0.1%m/m) underwhelming, but Michigan consumer confidence (82.1) exceeding expectations and the Chicago PMI (53.0) matching expectations.

All its research is available here.