by Kymberly Martin
NZ Dollar
The NZD/USD moved higher overnight in the backdrop of a weaker USD. It sits at 0.8020 this morning.
The NZD/USD was initially a little softer yesterday. Data showed NZ manufacturing activity declined 2.0%q/q s.a. in Q2. Partly attributable to earlier drought impacts, the data was sufficiently weak for us to revise down our expectations for Q2 GDP (due next week) to -0.2%q/q. Overall however we see the step down in Q2 activity as temporary, actually revising higher our expectations for Q3 GDP to 1.3%.
Overnight, the NZD was a beneficiary, along with most of its peers, of broad USD weakness. Having touched below 0.7970 yesterday afternoon the NZD/USD crept up to 0.8020 currently. Our model estimates a short-term NZD/USD ‘fair-value’ range of 0.8000-0.8600. This suggests fundamentals will provide no impediment to further NZD/USD appreciation in the event USD selling continues this week.
The NZD largely consolidated relative to European peers overnight. The NZD/EUR has failed to break convincingly above resistance at 0.6100, which has marked its highs for the past few months. It sits at 0.6050 this morning.
The NZD/AUD traded between 0.8680 and 0.8710 overnight, sitting at the lower end of this range currently. The fortunes of the cross will likely be in the hands of the AUD today, as the AU NAB business survey and Chinese data are released (see Majors), in the absence of key NZ data releases. The only scheduled domestic data is NZ electronic card transactions.
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Majors
The USD continued to weaken against most of its peers at the start of the week as US benchmark yields continued their drift lower.
The lingering impact of Friday’s US payrolls report continued to dominate markets in a data-light start to the week. Our risk appetite index (scale 0-100%) remained around 61% as equities were broadly flat in Europe, but the S&P500 is currently up 1.0%.
The WTI oil price has pulled back from last week’s highs around $110.50/barrel to sit at $109.50 this morning, as dialogue regarding the Syria situation continues. In the latest developments, the Russian foreign minister urged Syria to surrender its chemical weapons in a bid to avoid a US military strike on the region. Meanwhile the US Congress is yet to formally vote on the proposal.
The USD index has subsided from 82.20 to 81.70, as US 10-year yields have pulled back from last week’s highs of 3.0%, to sit at 2.90% this morning.
European currencies were beneficiaries by default. The EUR showed little direct response to one of the few data releases last night. The European Sentix Investor Confidence survey recorded 20.7% (3.5% expected), its first positive reading in two years. Overall the EUR/USD moved up from 1.3170 last evening to sit at 1.3260 currently. The GBP/USD has moved up to sit at 1.5700 this morning. Key resistance is now eyed at the mid-June highs around 1.5750.
The USD/JPY briefly broke above 100.00 yesterday as the Nikkei gained 2.5%. It subsequently dropped back to sit around 99.60 this morning. While much of yesterday’s attention was focused on Japan’s 2020 Olympic win, the more enduring news was in Japanese data releases. Q2 GDP was revised up from 0.6%q/q to 0.9%, largely thanks to better capital spending numbers. However, it is still anticipated that the Bank of Japan will announce more monetary stimulus in the future, helping to offset the negative impact of the government’s proposed increased consumption tax; stimulus will likely lead to further JPY weakness.
The AUD crept higher overnight relative to the weak USD. The AUD/USD sits at 0.9230 this morning, a key resistance level. The domestic focus for the currency today will be the August NAB business confidence survey. In recent weeks the market appears to be getting ahead of itself in pricing an improvement in AU’s fortunes. The market now sees only around a 50% chance of a further 25bps rate cut from the RBA, and a rapid U-turn in monetary policy thereafter. Some improvement in business confidence will likely be necessary to be consistent with this view. However, this survey will not capture any potential improvement post the recent election results.
Chinese data releases also have potential to impact on sentiment toward the AUD today. August industrial production, fixed assets, retail sales and money supply will be released today.
Elsewhere, it is fairly light on the data-front with only French IP and US small business confidence scheduled this evening. Expect developments in Syria to also inform general market sentiment.
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