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Chinese Flash PMI came in above expectations; improving Chinese prospects supportive for both NZ$ & A$

Currencies
Chinese Flash PMI came in above expectations; improving Chinese prospects supportive for both NZ$ & A$

by Mike Jones

NZ Dollar

The NZD/USD has spent the past 24 hours consolidating above 0.8350.

Investors appear to be suffering from a bit of headline fatigue. Despite some potentially important news and events, currency markets just haven’t been interested so far this week.

What’s more, there’s not a lot on the upcoming events schedule that seems likely to quicken the market’s pulse.

As expected, yesterday’s Chinese Flash PMI was supportive of the AUD and NZD. The AUD/USD in particular has outperformed, climbing back towards 0.9450 and squeezing NZD/AUD back below 0.8900.

The PMI rose from 50.1 to 51.2 in September, easily beating expectations of 50.9. A surge in new orders was responsible for much of this strength. All up, it appears the mid-year slowdown in Chinese economic growth appears to be behind us and the economy is accelerating again. This improvement in Chinese prospects is one reason we expect the NZD/USD to remain on a firm footing for the rest of the year (Q4 forecast 0.8350).

According to our Currency Flow Monitor, BNZ’s corporate client base sold into last week’s Fed-inspired NZD rally. Net currency flows for the week were in the 11th percentile. In other words, over the past two years, net flows have been above this level 89% of the time.

Net selling was evident in all of the NZD crosses, particularly NZD/EUR (3rd percentile) and NZD/GBP (10th percentile).

Looking ahead, another quiet day is in prospect today, with zilch on the Australian and NZ data calendars. We retain a positive NZD/USD bias for the week with losses expected to be limited to support at 0.8240. Short-term resistance is at 0.8430.

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Majors

It’s been a decidedly lacklustre start to the week in currency markets, as investors continue to take stock after last week’s wild ride. Movements across the major currencies have been small. The AUD has outperformed, while the USD has basically chopped sideways.

The initial excitement surrounding the German election result has faded to mild disappointment. The failure of Merkel to secure an outright majority has seen the EUR/USD dribble off yesterday’s 1.3550 highs (1.3500 currently). This was despite a generally upbeat round of September Flash PMIs.

Indeed, the rise in the European composite PMI to 52.1 from 51.5 (51.8 expected) points to the European recovery gathering pace and a second successive expansion in quarterly GDP.

European stocks back-peddled 0.6-0.7%, and this downbeat sentiment has tended to wash through to the US session. The S&P500 is currently down 0.5% and the VIX index (a proxy for risk aversion) climbed from 13% to almost 14.5%. Oil prices are off around 1%, to be down around 6.5% from the recent highs.

To be fair, US data may have been partly responsible for the souring in the mood. The Markit US manufacturing PMI confounded expectations for a September lift, falling from 53.1 to 52.8 (54.0 expected).

Probably more interesting were some comments from New York Fed President Dudley. In explaining the Fed’s decision not to taper last week, Dudley said the US economy’s “forward momentum” did not indicate labour market improvement would continue. He also referenced fiscal uncertainty as a factor in deciding the timing for a reduction in QE.  This suggests that even if we see a strong payrolls number next week, the Fed may prefer to wait until December (as is our view) to taper.

The rest of the week sees the publication of one or two important releases (US housing data and the German IFO), but by and large markets look to be treading water into next week’s US October non-farm payroll report. In the meantime, investors will hang off the words of this week’s long line-up of Fed speakers. We still believe the near-term balance of risks favours the downside for the USD.

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