by Mike Jones
NZ Dollar
The NZD/AUD yesterday notched up its biggest one day gain since May 2010. The bounce from 0.8660 to almost 0.8800 has re-established the uptrend and keeps our year-end 0.9000 forecast on the board.
At 0.8140, the NZD/USD also looks to have broken higher, but a daily close above the 0.8188 200-day moving average is needed to confirm the break. This sort of bullish signal would be consistent with a NZD/USD move back into the mid-80s.
However, the approach of next week’s show stopping FOMC meeting (Thursday morning) may inject a bit of caution into the market.
The NZ dollar’s gains all began with yesterday’s RBNZ meeting. It wasn’t so much that the Bank’s forecasts implied a first OCR hike 3 months earlier, i.e. around June next year, it was more that the RBNZ lifted its 90-day track by 50 basis through late 2014. And, importantly, this was even allowing for the (-30bps) impact of the LVR ‘speed limits’.
Interest rate markets barely budged in the wake of the statement. The fact that the local curve already priced earlier and more aggressive hikes than the RBNZ’s updated forecasts may have had something to do with this.
However, the NZD leapt ½ cent across the board. The strong currency reaction suggests the market may have picked up on a more conciliatory tone with respect to the currency. And, indeed, despite the TWI being a little higher than July, the Bank didn’t anywhere refer to the NZD being "overvalued", as it did through H1 2013.
Gains in the NZD/AUD continued following the release of the soft Australian employment yesterday. The fall in employment of -10,800 in August was consistent with other indicators pointing to increased pressure on the Aussie labour market. These pressures underpin our NAB colleagues’ expectation for at least one more 25bps RBA interest rate cut this cycle.
For today, there’s a smattering of local economic data to keep an eye on. The PMI will probably be the most important of the lot (which also includes food prices and consumer confidence). The PMI may struggle to hold its whopping 59.5 July level, but should nevertheless remain strong. On the day, NZD/USD should run into initial resistance around 0.8165, with support expected on any dips towards 0.8110 (ahead of 0.8080).
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Majors
Looking through a bit of early morning volatility, most of the major currencies are little changed in overnight trade. The USD index has traded choppily around 81.50 all night.
Currencies mostly consolidated overnight. A dearth of economic news and a listless night in global equities markets (the major equity indices are trading a few points either side of flat) provided little in the way of direction.
There was a brief flurry of excitement around the release of US jobless claims figures. The sharp drop to 292k (from 323k, 330k expected) saw the USD briefly skyrocket, before it was revealed a computer error meant two states’ data hadn’t been counted. The missing data will show up in next week’s release. After jumping to 99.70, USD/JPY quickly reversed its gains, maintaining the downtrend of recent days (currently 99.30).
European equities and the EUR weren’t really interested in a nasty downside surprise on EU industrial production (-1.5%m/m vs. -0.3% expected). However, alongside sliding interest rate differentials, the fact the European recovery may have lost steam in Q3 adds to the downside risks facing the EUR. EU-US 2-year swap differentials imply the EUR/USD should be trading closer to 1.3000 than the current 1.3300.
The only other interesting market movement of the night was the slump in gold prices. Prices have been falling all week on easing fears over a military strike against Syria. But overnight, they slumped 2.8%, to US$1325/ounce. In the absence of a bounce, this may add to speculative appetite to sell AUD/USD on rallies today.
Other News:
*BoE testimony offers nothing new for markets. Governor Carney says additional stimulus (QE) would be required only if the UK recovery were to falter. Rates seen as on hold until late 2016.
Event Calendar:
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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