NZIER business survey has confidence breaking multi-year highs and has been NZ$ positive

by Mike Jones

NZ Dollar

The NZD/USD has continued to trade choppily inside the familiar 0.8270-0.8340 range over the past 24 hours, as US fiscal uncertainty continues to buffet markets.

The currency opens the local session towards the bottom end of this range, thanks to a late session fight back in the USD.

Yesterday’s NZIER business survey was NZD positive to the extent it was consistent with above trend GDP growth. The various business confidence measures hit all sorts of multi-year highs.

However, the survey seemed to be overshadowed by a much less downbeat NAB Australian business confidence index.  The surge in business confidence to +12 (from +6) – the highest since March 2010 – has seen RBA rate cuts completed priced out of the AU curve.

This hasn’t spurred any noticeable narrowing in NZ-AU interest rate differentials though, with RBNZ pricing moving out to 75bps of hikes over the coming 12 months.

Nevertheless, NZD/AUD selling by speculative and leveraged accounts yesterday dragged the cross back below 0.8800, weighing on the NZD more generally.

Overnight, risk sentiment further deteriorated as US politicians continue to dither. Our risk appetite index (scale 0-100%) slipped below 50% for the first time since June. From overnight highs around 0.8330, the NZD/USD drifted off to around 0.8290.

For today, we’re expecting some strong electronic card spending numbers following yesterday’s buoyant Paymark figures. There is big upside risk on the 0.3%m/m expected by the market. A result on our expectations would provide a boost to the NZD/USD, although the likelihood of a dour session in Asian equity markets today means bounces should again be limited to resistance at 0.8330.

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Majors

Currency markets continue to wash around inside recent ranges, with all eyes on the political stalemate in Washington. On net, the majors are little changed from this time yesterday. Less than 0.6% separates the best and worst performers.

There were no major developments on the US political front overnight. A bill to raise the debt ceiling is close to being introduced by Senate Democrats, but even if it gets Senate approval it would still need to get through the (Republican controlled) House. No one is getting their hopes up. Note that over the past 24 hours both China and Japan have expressed concern over the value of their investments in US debt.

All the while financial market sentiment continues to slowly erode. The VIX risk aversion index pushed up another couple of points overnight. At 20.50%, it is now well above late September’s 13%. Global equity markets had another rough night, sliding 0.4-1.6%.

Sharp gains in short-term US interest rates have started to catch the market’s eye, as investors price an increasing chance of US government default. One-month Treasury bill yields have surged 30bps to 0.3% while CDS spreads on US government debt have leapt from 22bps to around 40bps. This is still low in an absolute sense (Spain is at 213bps), but the speed of the increase is cause for concern.

Currency markets, meanwhile, seem to be the market (so far) least affected by the political fallout. The only real trend – that of the uptrend in JPY – ran out of steam overnight, as USD/JPY bounced off the 96.75 200-day moving average. This helped the USD recover more broadly, having spent the first part of the night in decline. 10-year US bond yields also managed to stabilise around the 2.63% level, providing another steadying influence on the greenback.

The release with the greatest potential to spur a bit of FX volatility is tomorrow morning’s FOMC minutes. These may shed some light on the decision making process and the precise influences which led to the surprise announcement not to taper QE purchases in September. Hints the ‘no-taper’ decision was a very close one may lend some support to the USD.

Other news:

*German factory orders +1.1%m/m vs. -0.3% expected.

*UK RICS house survey reaches its highest level since May 2002 (54% from 45% in August).

*UK manufacturing and industrial production both print at 0.4%m/m in August.

*IMF cuts its 2013 global GDP outlook to 3.1% from 3.3%. Its 2014 global GDP forecasts were trimmed to 3.8% from 4.0%.

Event calendar:

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.

All its research is available here.