by Mike Jones
NZ Dollar
After a largely uneventful Friday night, the NZD has opened the week under downward pressure. However, if you squint your eyes through the recent volatility, the NZD/USD (at 0.8350) is barely changed from where it ended up in last week’s post-FOMC USD sell-off.
The weekend’s German elections delivered a decisive victory for Angela Merkel. The associated knee-jerk EUR buying has dominated the Monday-morning open. Losses in NZD/EUR and AUD/EUR have tended to weigh on the NZD/USD and (particularly) the AUD/USD in the usual liquidity-starved conditions.
To us, this looks like a good opportunity to ‘buy the dip’, ahead of a potential near-term strengthening.
Indeed, and as we noted last week, the promise of Fed QE carrying on for longer is positive for risk sentiment, equities, and commodities.
The NZD’s position as a ‘high-beta’, growth-sensitive currency means it is likely to outperform in this environment.
This has certainly been true of the NZD/AUD in recent sessions. With investors’ focus elsewhere, the cross has stealthily crept back above 0.8900. According to our short-term valuation model, NZD/AUD ‘fair-value’ is estimated in a 0.8400-0.8600 range. However, we think positive momentum can continue to carry the currency higher in the short-term. Our year-end forecast remains 0.9000.
The NZ and Australian data calendars are virtually empty this week. Direction for the NZD/USD will come from 1) global growth perceptions, and 2) general USD sentiment. We suspect 1) will be a NZD positive, with the latest round of global PMIs expected to show further signs of global repair. Of particular importance will be today’s HSBC Flash PMI out of China. The market expects an increase to 50.9 from 50.1.
On 2), a heavy schedule of Fed speakers and US housing data promises to set USD direction this week. But there’s also the upcoming political shenanigan’s in Washington to consider (see Majors). While the USD may dribble lower in the short-term, we suspect Fed speakers will help re-establish faith in tapering and the market will gravitate towards a December start date for such. This should limit the USD’s losses.
The net of the above leaves us with a positive NZD/USD bias for the week. Losses should be limited to support at 0.8240. Short-term resistance is at 0.8430.
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Majors
The unconvincing recovery in the USD continued on Friday. Still, the narrow DXY index has recouped only around ¼ of its post-FOMC losses. It finished the week down 1.3%.
Markets mostly remained in a state of post FOMC paralysis on Friday. US bond yields shuffled sideways (10-year 2.75% to 2.73%) and global equity markets slipped lower (S&P 500 -0.7%).
Helping the USD off its lows was a bit of FOMC post-match analysis from St. Louis Fed President Bullard. Bullard said the decision not taper was “borderline” and a taper was still possible for the October meeting which he described as “live”.
Outside of the NOK, the AUD was the weakest performing currency, losing 0.46% (to 0.9395), as it followed EM currencies and the gold price (-2.95%) lower. Note that we revised our AUD forecasts higher on Friday. We now expect 0.92 by year-end (previously 0.86).
News early this morning that German Chancellor Merkel has romped to victory in the weekend’s German elections should help steady the EUR/USD today, and shore up support at 1.3500 (currently 1.3325). On current polling Merkel’s CDU party appears to have an absolute (and unexpected) majority of 302 seats (out of 598).
Looking ahead, US housing data and Fed speak will be the focus of an otherwise quieter week data-wise. August US housing data will be examined for any impact from higher mortgage rates, as the market reluctantly restarts the taper on/taper off debate. Meanwhile, investors will be looking for further clarification of the Fed’s economic position from the likes of Lockhart, Dudley, and George.
Outside of the US, the latest PMIs from Europe (tonight) and China (today) will receive some attention, as will the German IFO (tomorrow night). The consensus expects further modest improvement in the PMIs which, if realised, should further bolster risk appetite and keep the USD under downward pressure.
Investors are also starting to pay a bit more attention to the upcoming ruckus in Washington. WSJ “Fed watcher” Hilsenrath said on Friday the Fed is worried about a political “brawl” regarding the looming US Budget and debt ceiling (a Budget is supposed to be passed by October 1, the debt ceiling will be reached in mid-October). For now, markets aren’t particularly worried, expecting the usual last minute deal to be done. This looks like the most likely outcome to us, although the uncertainty is one reason to think that the FOMC will wait at least until December to start tapering.
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