Rumours and denials about missile launches in the Med rattled investor confidence; oil rises 1.7%

by Mike Jones

NZ Dollar

The NZD was basically side-lined overnight. From above 0.7830, the NZD/USD dribbled back below 0.7800 as markets suffered another case of butterflies and speculative selling weighed on NZD/AUD.

The AUD has been the strongest performing currency over the past 24 hours. The RBA yesterday held its cash rate at 2.5% as everyone expected. But the accompanying statement was seen as another step towards a ‘neutral’ policy stance. There was no hint of the easing bias many had been looking for.

In response, Aussie markets have taken 10-15bps of easing out of the interest rate curve, sending swap yields higher and the AUD/USD from 0.8980 to above 0.9050. The consequent reduction in NZ’s yield advantage dragged NZD/AUD from 0.8700 to 1½ month lows around 0.8610. Previous support at 0.8625 looks to have been broken.

We don’t believe the losses in NZD/AUD will extend beyond the next layer of support around 0.8505. Indeed, we expect the cross to re-strengthen in time, reflecting NZ economic outperformance and the likelihood the RBA is dragged back to the easing table in November. Our year-end forecast remains 0.9000, although we do have to acknowledge the downside risks (see yesterday’s strategy note for more).

Overnight, rumours and denials about missile launches in the Med rattled investors. Oil prices are up around 1.7% and the VIX index (a proxy for risk aversion) climbed from 16.5% to almost 17.5%. This did trigger sporadic bouts of NZD/JPY and NZD/USD selling but a late bounce in US stocks has helped prevent any lasting fallout (S&P 500 currently up 0.5%).

Another positive NZ dairy price auction also helped steady NZD sentiment. Prices slipped 1.1%, but remain at very high levels (+51%y/y). Moreover, price declines were concentrated in the nearer dates, with prices on the longer-dated (6 month) contract up 4.6%.

For today, we’re looking for a 4% volume lift from today’s NZ Building Work Put in Place survey, but we’re conscious of a downside surprise. Whatever the outcome, there will be more attention on Q2 Australian GDP figures to be released at 1:30pm (NZT). Our NAB colleagues expect a 0.4% quarterly increase, below the 0.5% expected by the consensus.

While the NZ/AU data probably tilts the balance of NZD/USD risks to the downside on the day, we suspect support around 0.7730 will hold. We’d continue to play the 0.7730-0.7840 range in the run in to US payrolls and the ECB/BoE meetings later in the week. Local swap yields should open higher following the moves in Aussie yields yesterday.

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Majors

It’s been a night of skittish and whippy price action in currency markets. The recent trend for a stronger USD ultimately won the day, but without much conviction. Investors appear reluctant to fully price a September start to Fed tapering ahead of payrolls on Friday.

Vague rumours of ballistic missiles being launched in the Eastern Mediterranean did nothing to calm nerves. The associated rise in general risk aversion buoyed the JPY and dragged most of the JPY crosses lower through the early part of the night. EUR/JPY briefly lost 0.5% before recovering back to around 131.00.

USD/JPY was launched to almost 100.00 following an exceptionally strong August US ISM manufacturing index. The headline index rose to a 28-month high of 55.7, well above the 54.0 expected. It’s another sign that US GDP growth is accelerating in the third quarter, strengthening the case for the Fed to begin tapering QE in September.

In response, US 10-year Treasury yields surged 9bps to almost 2.91%, dragging USD/JPY higher. But, curiously enough, US yields subsequently gave up most of these gains, pulling USD/JPY from 99.80 back to around 99.40.  Following July’s payrolls disappointment, it may be that speculative investors are wary of being overly long USD and short Treasuries going into Friday’s August payrolls data. In the event the data is ok (jobs of ≥180k) we’ll likely see USD longs put back on again. 

We doubt today/tonight’s global data schedule (see calendar) will do much to shake currency markets out of their choppy sideways trading ranges. The Bank of Canada is unanimously expected to keep rates at 1% and European services PMIs should continue the recovery theme (51.0 expected for the composite EU index), potentially strengthening EUR/USD support at the 1.3145 200-day moving average.

Other News:

UK construction PMI hits the highest level since September 2007 (59.1 from 57.0 – 56.9 expected).

Event Calendar:

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.

All its research is available here.