by Kymberly Martin
NZ Dollar
The NZD/USD was launched higher yesterday morning. Subsequently it consolidated it gains until early this morning when it has subsided to 0.8160.
Yesterday’s domestic data releases (Performance of Services Index, REINZ house prices) had little impact on the NZD.
Eyes are firmly focused offshore at present. Following the Summers announcement yesterday morning, the NZD/USD was catapulted from 0.8140 to above 0.8220. During the day the currency consolidated in a tight 0.8180 to 0.8220 range. However, early the morning the broad USD index began to claw back some of its losses. This saw the NZD/USD subside to 0.8160 currently.
There is little on the domestic agenda to influence the NZD/USD today, so its fate will largely be determined by sentiment toward the USD. It may re-attempt to sustain a break through key resistance at the 0.8165 level today. Support is seen at 0.8100.
Early tomorrow morning the latest global dairy auction will take place. We expect this will continue to show robustness. This is consistent with our view that NZ commodity prices provide underpinning to the NZD over the medium-term.
The NZD/AUD experienced heightened volatility early yesterday morning before settling into a tight trading pattern most of the day. Dipping below 0.8750 late last night it has crept up to trade at 0.8770 this morning.
The release of the September RBA minutes (1.30pm NZT) will likely be the key driver of the cross today. The market has recently ratcheted back expectations of a further RBA rate cut to 50%. Our NAB colleagues expect a 25bps cut in November.
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Majors
The USD bore the brunt of the announcement that Summers was resigning from the Fed leadership race. Subsequently it stabilised. Most currencies maintained a pattern of consolidation overnight, drifting slightly lower relative to the USD early this morning.
In the wake of the Summers announcement our risk appetite index (scale 0-100%) remained fairly stable at a healthy 65% level. Offshore credit spreads narrowed while equities provided positive returns. The Euro Stoxx 50 closed up 1.0% and the S&P500 is currently up 0.60%.
The USD gapped lower at the open yesterday morning. The market extrapolated that Summers resignation would raise the probability of ‘dovish’ Vice-Chair Yellen taking the role. The prospect of more accommodative monetary policy would suggest a weaker USD longer-term. The USD index opened at 81.10 after closing at 81.50 last week.
USD data was slightly on the soft side of expectation overnight. However, US Sept Empire Manufacturing (6.29 vs. 9.10 expected) and Aug industrial production (0.4%m/m vs. 0.5% expected) did not cause too much concern. The USD index traded below 81.00 early this morning but has clawed its way back to 81.20 currently.
The EUR/USD and GBP/USD traded very tight ranges for most of the night after their step-shift higher early yesterday morning. However, as the USD grappled higher in the early hours of this morning, both have subsided toward intra-night lows at 1.3340 and 1.5900 respectively.
Still, the GBP/USD remains close to its highest level since mid-January. It is underpinned by the recent signs of improving momentum in the UK economy.
Tonight, the UK focus will be on pricing data ranging from CPI to house prices. CPI will likely remain at a 2.6-2.7%y/y level, someway above the 2% target the Monetary Policy Committee has recently reaffirmed. House price data will also be of interest.
BoE Governor Carney has recently expressed concerns regarding the potential for house price re-appreciation. He has raised the option of using ‘alternative tools’ to address the issue. Policies similar to the RBNZ’s imminent LVR tools may become more widespread.
The AUD/USD experienced harsh volatility yesterday morning, but consolidated during the evening. It touched above 0.9380 early this morning. Subsequently, as the USD grappled a recovery the AUD/USD has slipped to 0.9310 this morning.
The focus for the AUD today will be the RBA September minutes. They will likely highlight the AU economy continues to run below trend and that the inflation outlook is consistent with targets. The market currently prices around a 50% chance of a further 25bps rate cut from the RBA. Our NAB colleagues expect a 25bps cut in November.
Tonight, the German ZEW survey will be released. The US will issue Aug CPI data. Consensus expects core CPI to remain around 1.8%y/y. This suggests inflation is not yet a threat to the Fed’s desire to maintain broadly accommodative policy. The US NAHB housing market index will also be released.
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