by Mike Jones
NZ Dollar
The NZD has been the strongest performing currency over the past 24 hours. The NZD/USD has rocketed around a cent higher to 0.7910 while the NZD/JPY has soared from 77.60 to almost 79.00.
Global risk aversion eased up overnight, as buoyant service sector data reinforced the notion global growth is picking up (see Majors). In addition, tensions over military action in Syria haven’t kicked on, evidenced in falling oil prices. Our risk appetite index (scale 0-100%) climbed to 58.6% from 55.5% at the start of the week.
With global markets a little less nervous, the NZD’s supportive fundamentals have tended to shine through.
This week’s NZ commodity price data (ANZ index and GDT dairy auction) were all NZD supportive, with prices looking set to hold near record highs in coming months. Moreover, NZ interest rates continue their upward creep, bolstering the currency’s yield advantage.
At 3.50%, two-year swap rates are only a smidge below August’s 3.55% two year highs. Based on the 2s10s spread, the NZ yield curve is now the steepest it’s been since October 2011.
Short covering also appears to be a feature of the NZD’s overnight gains, with speculative and leveraged accounts wary of running large shorts into Friday’s US payrolls. This effect can be clearly seen in NZD/AUD which, at 0.8630, has more than recouped its losses following yesterday’s better-than-expected GDP data.
For today, local data is fairly thin on the ground. Australian trade balance figures will be released at 1:30pm and the Bank of Japan will release their latest policy decision sometime late this afternoon. No change in policy is expected now that Japanese inflation is picking up and cyclical indicators are improving. But further action later in the year cannot be ruled out. Indeed, this is what underpins our forecasts for NZD/JPY to push back above 80.00 in Q4.
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Majors
Financial market sentiment brightened overnight. As a result, the relative ‘safe-haven’ of the USD and JPY has been shunned in favour of the NZD, AUD, GBP, and CAD.
US stocks are currently up 0.7-1.0%, following gains of 0.1-0.5% across European bourses. Yields are either flat or very slightly higher (US 10-year 2.9%), and the VIX index (a proxy for risk aversion) has eased off yesterday’s 17.5% highs (currently 16%).
Commodity prices, meanwhile, are marginally lower. Notably, news US President Obama has secured Republican backing for action on Syria hasn’t really impacted oil prices; NYMEX crude is 1.3% lower around US$107.2/barrel.
Ostensibly, investors’ cheerier mood reflects another slate of surprisingly positive services data. China’s unofficial HSBC measure accelerated to 52.8 from 51.3 yesterday. The Euro Zone measure didn’t accelerate, but at 50.7 (vs. 51.0 in July) remains supportive of sentiment.
The UK was once again a stand-out performer. The UK services PMI jumped to 60.5 (consensus 59.7) – the highest reading since Dec 2006. The upshot of this latest run of positive UK data is Q3 GDP (due 25 Oct) could see a figure around 1%q/q, bringing y/y growth up to around 1.7%-1.8%.
In currency markets, the AUD and NZD have outperformed. While this of course reflects their ‘growth-sensitive’ properties, short covering in the antipodeans also played a role. EUR/USD and GBP/USD meanwhile notched up gains of 0.4-0.5%, the former bouncing nicely off the 1.3146 200-day moving average.
At 1.5630, GBP/USD is now some 5.5% above its July lows. There are some risks ahead for GBP though, in the form of tonight’s BoE meeting. In particular, Governor Carney may be tempted to have another crack at the recent back up in Gilt yields as a potential threat to the UK recovery. The GBP has so far largely shrugged off Carney’s dovish sentiments, but such a statement may inject a bit of caution into the market.
The ECB’s latest policy decision is also due tonight. No one expects any changes in policy. However, Draghi will likely play up the recent improvement in EU data while reiterating forward guidance that rates will stay low for an extended period. We doubt this sort of statement would knock the EUR out of bed. Following last night’s bounce, we look for some 1.3145-1.3255 consolidation ahead of payrolls.
Keep an eye out as well for tonight’s ADP employment figures out of the US, as a guide on what to expect from Friday’s payrolls.
Other News:
*US trade deficit widens more than expected in July as imports race ahead of exports (US$-39.1b vs. US$-38.6b expected).
*Second estimate of EU GDP confirms GDP expanded 0.3% in Q2.
*Bank of Canada leaves rates at 1.0% as expected.
*New York ISM eases back to 60.5 in August from 67.8 in July.
Event Calendar:
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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