by Mike Jones
NZ Dollar
Currency markets continue to be held hostage by US budgetary wrangling. Most of the major currencies drifted overnight as investors played the waiting game. Still, the NZD/USD managed to shake off its Monday-itis, bouncing from 0.8270 to 0.8330.
The NZD’s recovery looks to be a reflection of both generalised USD selling, and snippets of NZD demand from Asian real money accounts. It takes us back to the middle of the familiar 0.8240-0.8435 range.
It’s hard to see this range breaking this week with the US shutdown and approaching debt ceiling debate restraining trading interest and limiting investor participation.
There are signs of increased caution and uncertainty. Various risk aversion indicators have pushed higher and global equity markets have lost steam. As a result, upward momentum in the NZD has cooled somewhat.
According to our FX momentum model, momentum in NZD/EUR, NZD/AUD, and NZD/GBP has flipped from positive to neutral. Moreover, the closer we get to the 17 October debt ceiling “D-day” the bigger the risk of either a massive hit to US GDP growth or a technical US government default.
As we noted in our strategy note last week, the associated risk aversion and uncertainty could (briefly) send the ‘high-beta’ NZD/USD sliding back below 0.8000. The NZD/JPY is probably even more at risk given the safe-haven appeal of the JPY is greater than the USD in the current environment.
Today’s NZIER business survey is expected to strengthen from last quarter. As such, it should be consistent with the economy moving well into above-trend growth, increasing pressure on supply as it does so.
While the NZD rarely reacts strongly to the NZIER survey, a positive result would help keep the overnight positive bias intact. A test of short-term resistance at 0.8350 looks likely on the day.
------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
A slightly more negative tone prevailed overnight, as markets drifted through Day 7 of the US Government shutdown. A potential US default is now less than 10 days away and we appear no closer to a compromise on either the shutdown or a deal to raise the debt ceiling.
US and European stocks have again dipped into the red, and the VIX index (a proxy for risk aversion) has pushed higher from 16.5% to almost 18.5%.
US Treasury yields have continued to dribble lower, undermining general USD sentiment. From 2.65% on Friday, 10-year yields are now closer to 2.61%. The early September 3% highs seem like a long way away.
Currency markets have basically consolidated. A modest softening in the USD was again a feature, although it’s interesting to note the outperformance of the non-USD “safe-havens” – the CHF, GBP and particularly the JPY.
We continue to believe the JPY stands to benefit the most from US fiscal shenanigans, due to its strong safe-haven characteristics and dissociation from the US budget troubles.
USD/JPY continued to trend slowly lower overnight, consistent with the slip lower in US yields. At 96.85 it is now at the weakest level since early August. The next key support level is eyed around 95.80.
The GBP/USD enjoyed a small bounce (1.6090 from 1.6020), while most of the other majors simply shuffled sideways.
Looking ahead, listless and increasingly defensive price action will remain in force for as long as US fiscal uncertainty continues. With US economic data releases still disrupted, German factory orders are likely to be the highlight of tonight’s data offering, although there’s also some Fed speakers to potentially provide direction (Fisher, Pianalto, and Plosser). More chastising of Congress is likely. Investors may also look to the Q3 corporate earnings season for a gauge on sentiment toward the US. The consensus expects earnings growth of 2.2%q/q.
Other news:
*World Bank cuts 2013 growth forecast for developing Asia to 7.1% from 7.8% – largely thanks to a trimming of growth forecasts for China from 8.3% to 7.5%.
Event calendar:
Oct 8: NZ NZIER business survey; AU NAB business confidence; AU job ads; CH HSBC services PMI; EU German factory orders; US Fed’s Plosser speaks;
Oct 9: AU consumer confidence; UK manufacturing production; US FOMC minutes;
Oct 10: NZ BNZ PMI; AU employment; UK BoE policy decision; US jobless claims; US Fed’s Bullard & Williams speak;
Oct 11: NZ food price index; EU German CPI; US Michigan consumer confidence;
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.