by Mike Jones
NZ Dollar
The NZD/USD’s probe back into the 80s continued overnight, fuelled by recovering risk appetite and improving sentiment towards the Chinese economy. The NZD/USD is ½ cent higher than yesterday around 0.8070, while the outperformance of the AUD has squeezed NZD/AUD down to 0.8665.
As expected, yesterday’s partial indicators provided further evidence that China’s economy is stabilising. Industrial production, business investment, and retail sales all came in above market expectations in August (industrial production 10.4%y/y vs. 9.9% expected). This fits with our expectation China’s growth will stabilise around 7.5% in the second half of 2013.
The data set the NZD and particularly the AUD on a path higher. And, overnight, with global equity markets rising and Syrian military tensions easing, the antipodeans extended their gains.
The AUD/USD is now on the cusp of breaking through the 0.9317 resistance that has capped the currency since last June. An increase in Aussie consumer confidence today (following the increase in business confidence yesterday) may be enough to trigger an upside breakout, bringing 0.9500 into view.
There is no NZ data to watch for ahead of tomorrow’s RBNZ policy announcement. We’ve already highlighted the risk Governor Wheeler pushes back on rate hike expectations, weighing on the NZD.
The NZD/GBP is particularly vulnerable given ongoing signs of strength in the UK economy. If tonight’s UK labour market figures look good, we could see NZD/GBP retest the bottom end of its recent 0.4980-0.5200 range.
On the day though, we’d expect the positive NZD bias to continue, particularly if Asian equity markets take the lead from the positive offshore session.
Near-term resistance for NZD/USD remains at 0.8105, with support expected to kick in on dips towards 0.8015.
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Majors
Risk appetite has brightened overnight, thanks to yesterday’s encouraging Chinese data and the fading likelihood of military intervention in Syria. The NZD and AUD have revelled in this more optimistic backdrop, while the ‘safe-haven’ CHF, JPY and USD have all underperformed.
Investors have taken heart from Russia’s offer to broker a diplomatic solution to the Syrian chemical weapons crisis. The Obama administration has shown a clear preference for a diplomatic solution, and reports suggest the Congressional vote on a military strike will no longer take place at all this week.
Oil prices, as the key conflict ‘barometer’ have continued their sharp retreat. The 1.8% overnight fall takes prices to more than 3% below last week’s US$111/barrel peak.
Equity markets, meanwhile, have surged on the back of falling oil prices and a seemingly stabilising Chinese economy. European bourses rose 0.8% to 2.1%. The S&P500 is up around 0.6% and the VIX index (a proxy for risk aversion) slipped from 15.5% to 14.8%, having ‘peaked’ last week around 17%.
In currency markets, improving risk appetite has seen growth sensitive currencies outperform at the expense of the traditional ‘safe-havens’ (the GBP and EUR are little changed). For the USD, this has occurred despite further modest gains in bond yields (10-year +4bps to 2.96%).
The JPY has been hit particularly hard, with various Japanese officials noting PM Abe is readying a September economic stimulus package to offset the proposed sales tax hike. From 99.50 early in the night, USD/JPY climbed to almost 100.40. A daily close above 100.20 would be consistent with a re-establishment of the uptrend.
Looking ahead, risk appetite looks set to continue to ebb and flow with Syrian headlines. But with the risk of imminent military action receding, we wouldn’t’ be surprised to see last night’s ‘pro-risk’ price action continue in the short-term.
Tonight’s UK labour market data should be GBP supportive. We expect another fall in the claimant count but no shift in the targeted ILO measure of unemployment from 7.8%. Our London colleagues have entered a GBP/JPY long at 157.25, looking for 162.50.
Other News:
*US NFIB small business optimism stabilises at 94.0 (95.0 expected).
*Italian Q2 GDP revised down to -0.3%q/q (-0.2% expected).
*French industrial and manufacturing production disappoints.
Event Calendar:
11 Sep: AU consumer confidence; EU German CPI; UK ILO unemployment
12 Sep: NZ RBNZ announcement; AU employment; US jobless claims;
13 Sep: NZ PMI; NZ food prices; NZ consumer confidence; JN industrial production; US PPI; US retail sales; US Michigan consumer confidence.
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