by Mike Jones
NZ Dollar
The recovery in all things NZD continued overnight, fuelled by encouraging global data and retreating oil prices.
In fact, the NZD was the strongest performing G10 currency, with the NZD/USD settling back above 0.7800.
Still, we wouldn’t read too much into last night’s price action.
US markets were closed, restricting liquidity and trading interest.
Moreover, most investors remain content to sit on the side-lines ahead of the RBA meeting today, and the important US data later in the week.
As we noted yesterday, the positive global news simply reinforces support at the bottom end of the NZD/USD’s recent 0.7690-0.8100 trading range.
Yesterday’s sizeable lift in NZ’s terms of trade probably helped underpin the NZD over the past 24 hours. The 4.9% quarterly gain was well north of the 3.8% the market had been expecting.
The terms of trade are now within 2.5% of the 37-year high hit a couple of years ago.
Plugging the Q2 terms of trade number into our terms of trade-adjusted-PPP model bumps our estimate of the NZD/USD’s long-run equilibrium up to 0.7200, from 0.7000. For NZD/AUD, it rises from 0.7850 to 0.8050.
Near-term direction for the NZD/AUD will come from today’s RBA meeting (AU retail and current account figures will also be released today). All and sundry expect the cash rate to be left at 2.5% (just a 5% 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 re-establish a foothold above 0.8700.
We still believe the RBA will be dragged back to the easing table later in the year. Formally, our NAB colleagues expect a 25bps rate cut in November. If this pans out, the NZD/AUD should receive another leg-up, with Aussie OIS markets now pricing little in the way of additional easing.
In NZ, keep an eye out for the ANZ commodity price index at 1pm. We expect a 1% gain, ahead of a more timely update of NZ commodity prices from tomorrow’s GDT dairy price auction.
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Majors
Financial markets have started the week in a positive frame of mind. Manufacturing data out of China and Europe essentially confirmed global economy is on the mend, and oil prices have eased off their highs as the threat of immediate Syrian intervention fades. Still, price action has been fairly tame, reflecting the closure of US markets for Labour Day.
The August round of global manufacturing PMIs were fairly encouraging. China’s edition exceeded expectations, as we noted yesterday.
Overnight, the European PMIs confirmed the tentative recovery continues (EU composite 51.4 vs. 51.3 expected), with Italy seeming to capture the most attention (51.3 vs. 50.8 expected). Meanwhile, the UK PMI jumped to the highest level since early 2011.
European stocks rallied strongly; the EuroStoxx 50 rose 1.9%. US equity markets are closed but S&P500 futures are currently up around 1%. Oil prices have fallen as expected following the weekend’s news Obama will ask Congress for approval to enter Syria. NYMEX futures are off 0.9% to US$107/barrel.
Equity market strength and renewed global optimism has produced the expected reaction in currency markets.
The ‘growth-sensitive’ NZD and AUD have outperformed, with the ‘safe-haven’ JPY and CHF languishing at the bottom end of the currency performance rankings. JPY crosses have traded particularly heavily; USD/JPY is up almost a figure from the Monday open around 99.40. The GBP continued on its UK revival-driven push higher; the GBP/USD topside around 1.5590 was briefly tested.
We continue to look for additional JPY weakness and USD/JPY strength ahead, targeting 101 for USD/JPY by the end of Q3. The results of the ‘panel sessions’ regarding the planned Japanese sales tax increase saw most experts back the move. This increases the chances of additional BoJ policy easing later in the year, although we doubt this week’s meeting will provide much excitement.
Tonight brings the US ISM manufacturing survey, the first of this week’s heavyweight US data releases. The market expects a small fall to 54.0 (from 55.4 in July). A larger fall would see the USD check some of its recent gains, paving the way for a further push to the topside in NZD, AUD, and GBP.
Event Calendar:
3 Sep: CH non-manufacturing PMI; NZ ANZ commodity price index; AU retail sales; AU current account; AU RBA meeting; US ISM manufacturing;
4 Sep: NZ construction; AU GDP; EU services PMIs; US trade balance; EU retail sales; CA Bank of Canada decision; NZ GDP dairy auction; US ISM New York; US Fed’s Williams speaks;
5 Sep: AU trade balance; JN BoJ meeting; UK BoE meeting; EU ECB meeting; EU German factory orders; US ADP employment; G20 Leader’s Summit begins;
6 Sep: EU German IP; US Fed’s Evans speaks; US non-farm payrolls; US unemployment rate; US Fed’s George speaks.
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