by Mike Jones
NZ Dollar
The NZD/USD is once again paying for the US’s sins with a collapse in the USD propelling the NZD/USD to fresh 5-month highs above 0.8520 overnight.
As we noted yesterday, while the US has temporarily patched up its fiscal issues, lasting damage has been done to the USD. Not only will US Congress be doing it all again in February/March, but the resulting uncertainty could delay Fed tapering until well I nto 2014. The market has already moved to reflect this risk with 10-year US bond yields losing 15bps over the past two days.
Investors sold the USD against just about anything they could find overnight. Emerging market currencies have lurched higher and the G10 ‘major’ currencies are up between 0.4-1.3%.
For the NZD/USD, the break through 0.8445 resistance overnight triggered a raft of stop/loss orders, squeezing the currency above 0.8500 for the first time since early May. Leveraged and speculative accounts have been notable buyers over the past 24 hours, easily soaking up lumps of selling from local importers.
For today, attention will switch from the US to a raft of Chinese economic activity updates due at 3pm (NZT). Q3 GDP will be the most closely watched, with the consensus expecting a pickup in growth from 7.5% to 7.8%. There’s also monthly industrial production and retail sales to monitor.
Given the stabilisation/acceleration underway in China, the risk is probably for some stronger-than-expected numbers. Such a scenario would see the NZD/USD and AUD/USD extend their overnight gains. Aside from the 0.8530 overnight highs, the NZD/USD faces little resistance ahead of 0.8590. Support will be found on any dips towards 0.8450.
Also of interest today will be a couple of speeches from the RBA’s Stevens and Ellis. Comments from the former will be scrutinised for any hints the resurgent AUD/USD could bring the RBA back to the policy easing table in coming months.
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Majors
The greenback has been roundly slammed overnight. The USD index has lost just over 1%, with the major currencies notching up gains of 0.4% (CAD) to 1.3% (GBP).
Contrary to some reports, the USD backlash hasn’t really been about improving risk sentiment. Indeed, global equities markets are mixed (S&P500 +0.3%, Dow Jones -0.3%) and risk appetite gauges are broadly stable.
The sell-off in the greenback more reflects 1) frustration and uncertainty over the US fiscal picture. While a stop-gap measure has been agreed upon, the deadline to raise the debt ceiling again is only 107 days away. Chinese ratings agency Dagong cut its sovereign rating on the US one notch to A- overnight. Recall Dagong downgraded the US a few days before the US lost its AAA S&P rating back in August 2011. 2) A push back in Fed tapering expectations.
A shutdown hit to Q4 US economic activity, not to mention the increased uncertainty of another fiscal catfight in February/March, may keep the Fed from tapering until well into 2014, possibly even mid-year. Indicative of the push-back in tapering expectations, 10-year US bond yields lost a full 7bps overnight (to 2.59%) to be 16bps below yesterday’s 2.75%.
Investors have sold the USD indiscriminately. The GBP has tended to outperform though, following some positive UK retail sales figures (0.7% ex auto vs. 0.3% expected). GBP/USD is 2 cents higher around 1.6160, the EUR/USD is up a bit over a cent around 1.3670, and USD/JPY has slipped from 99.00 to closer to 97.80.
Near-term, backlogged US economic data is likely to become the focus for currency markets. We should get September non-farm payrolls next week. A 200k or so employment gain may restore some of the USD’s honour.
However, investors may be tempted to look through any strength in September data given the fiscal fallout that followed. October data reports may not be released until late November, leaving the Fed in limbo and keeping the USD heavy. Near-term support on the USD index is eyed around 79.60, with a break below here bringing into view the February 78.90 lows.
Other News:
*US Philly Fed +19.8 vs. +15 expected.
*US jobless claims 358k vs. 335k expected.
Event Calendar:
Oct 18 AU RBA Governor Stevens speaks in Sydney; CH GDP, industrial production, retail sales.
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