Direction of US$ will be largely be determined by fiscal negotiation developments; NZ$ benefits from improved risk appetite

by Kymberly Martin

NZ Dollar

The NZD/USD has traded a steady path over the past 24-hours to sit at a similar level this morning, just above 0.8360.

Yesterday’s speech from the RBNZ’s Deputy Governor outlined concerns regarding the NZ housing market. It highlighted supply constraints and reiterated the reasons for implementing the LVR restriction on banks, but did not provide anything to surprise the market.

The NZD/USD has traded a fairly steady path between 0.8360 and 0.8400 over the past 24-hours, sitting toward the lower end of this range at present.

The NZD has strengthened against European peers, to be sitting at key resistance levels relative to the EUR and GBP this morning. The NZD/GBP sits at 0.5240 this morning having pushed as high as 0.5270 overnight. The NZD/EUR sits at 0.6200, close to its late-September highs. A push through this level would be significant.

Overall sentiment toward the USD will be determined by developments in US fiscal negotiations for the remainder of the week. Any resolution could see a knee-jerk improvement in demand for the USD, though the NZD may also benefit from improved risk appetite.

However, today, domestic data may also play its part in determining the NZD’s fortunes. Q3 CPI will be released. We, consensus and the RBNZ are all closely aligned in expecting a pickup in annual CPI from 0.7% to 1.2%.

This should confirm inflation has bottomed ahead of a gradual rise we expect through next year. We believe OCR ‘normalisation’ is necessary in order that annual CPI does not breech the top of the RBNZ’s 1-3% target band over the next couple of years.

For today, NZD/USD resistance remains at 0.8400. Support should be found around 0.8340.

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Majors

The USD outperformed its European peers overnight. The AUD was the strongest performer over the past 24-hours.

There appears to have been little tangible progress in US fiscal negotiations overnight. One table proposal was described as a “blatant attack on bipartisanship”. While US bonds tracked sideways, equity markets also seemed to be holding their breath. The S&P500 is currently almost flat, although the Euro Stoxx 50 did manage a solid 0.90% gain.

The USD moved higher overnight, benefitting from EUR weakness, but potentially also benefitting from a rumoured sizeable USD hedge-fund order. The USD index sits at 80.60 this morning.

The EUR/USD fell overnight after the release of the German ZEW survey. While the forward-looking ‘expectations’ component picked up from 49.6 to 52.8, current conditions declined (29.7 vs. 31.3 expected). The EUR/USD slipped from above 1.3560 to sit close to 1.3500 this morning.

The GBP/USD showed a bit of volatility overnight. First it spiked higher after data showed UK September inflation rising 0.4%m/m (0.3% expected), to be up 2.7%y/y. But the GBP soon got dragged down in sympathy with the EUR. Finally, the GBP/USD has clawed its way back to sit around 1.5980 currently. UK unemployment data will be released tonight as a potential driver of the GBP.

The AUD/USD was the strongest performer amongst its peers over the past 24-hours. It was on a steady upward path yesterday.

The RBA’s October Minutes confirmed the RBA is comfortably on hold for now. The AUD/USD pushed above 0.9540 overnight, before returning to trade around 0.9520. The levels reached overnight were the highs on the AUD/USD since mid-June. There are no key AU data releases today, though the currency will likely re-attempt to push higher on the day.

However, overall market sentiment and the tone of the USD will remain dictated by progress in US fiscal negotiations. A break-through could see a short-term surge in appetite for the USD. US NABH housing market data and the US Fed’s Beige book will also be released tonight. In the Eurozone CPI data is scheduled.

All its research is available here.