Stronger PMI and PSI data shows broad based momentum in NZ economy and this is underpinning the NZ$

by Kymberly Martin

NZ Dollar

In quiet, holiday-hampered markets overnight the NZD/USD inched a little higher, to sit above 0.8360 this morning.

Yesterday’s release of the NZ PSI showed the services sector increased its levels of expansion in September. The PSI moved up to 55.6 in the month from 53.3 in August.

Importantly, the employment index, while not strong, nudged up to 51.2 from the essentially flat reading of 50.1 it recorded in August. Combined with last week’s strong PMI reading the PSI shows the economy to have broad-based momentum. Relative growth dynamics should continue to underpin the NZD. Overnight, the NZD/USD has consolidated just above the 0.8360 level.

The NZD was slightly stronger on key crosses. The NZD/GBP is pushing at key resistance in the 0.5230-0.5260 window. A break-through this level would open the way for a return to 0.5300 and beyond.

The NZD/AUD attempted to break higher overnight, but found resistance at the 0.8850 level. It has returned to rest around 0.8820 this morning.

Today, the market will be focusing on central bank activity on either side of the Tasman, with the release of the RBA’s October Minutes, and a scheduled speech by the RBNZ’s Deputy Governor. The Minutes are expected to show the RBA to be comfortably on hold for now.

The RBNZ’s speech on the NZ housing market will capture the market’s attention following the recent introduction of LVR restrictions for banks.

Overall, divergent monetary policy that we see ahead (higher rates in NZ, lower in AU) is a key reason we expect the NZD/AUD to trade above 0.9000 in the early part of next year.
For today, NZD/USD resistance is eyed at 0.8400. Support should be found around 0.8340.

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Majors

Public holidays in US, Canada and Japan took their toll on markets. Currencies traded tight ranges, with the USD index slightly lower at 80.25 this morning.

There was little to drive sentiment overnight with few data releases and no development in the US fiscal negotiations during the US Columbus Day holiday. Overnight, equity markets were very subdued providing fairly flat returns in Europe and the US.

The one data point of note was the release of Eurozone industrial production for August. It came in above expectation rising 1.0%m/m (0.8%expected) for a year-on-year decline of 2.1%. However, the data betrayed a worrying dependence on German production which surged 1.8% in the month. While industrial production in the region in recovering the sector still seems weak and overly dependent on Germany.

Just before the release the EUR/USD touched its lows for the night below 1.3550, but managed to grapple higher to around 1.3570 this morning.

The AUD/USD crept a little higher overnight to trade around 0.9480 this morning.

Today’s focus for the currency will be the release of the October RBA Minutes. These are expected to show the RBA sitting comfortably on hold. The September Minutes showed the RBA reluctant to cut again. The subsequent improvements in business and consumer confidence, and the gains in house prices, would have been welcomed.

Still, in coming months our NAB colleagues anticipate further deterioration in growth momentum and the labour market will necessitate a further RBA cut. The market currently prices only a 40% chance of this outcome.

Tonight, markets will remain focused on developments, or lack there-of, in US fiscal negotiations. The US Empire Manufacturing index will also be released along with the German ZEW survey.

All its research is available here.