by Mike Jones
NZ Dollar
A combination of firming risk sentiment and a weaker USD continued to fan the NZD uptrend on Friday.
After a brief pull-back to 0.8450, a late session bounce saw the NZD/USD finish the week at 0.8502. Only the AUD and NOK put in a stronger Friday performance.
The NZD is in a something of a ‘sweet spot’ for currency strength at present.
The USD is suffering from back-peddling Fed tapering expectations and falling bond yields. Risk appetite is surging anew (our index of such rose from 62.3% to 71.4% last week).
Volatility is plunging (1-month NZD vols hit 5-month lows below 9.5% on Friday).
And domestic economic indicators suggest NZ economic growth is poised to accelerate towards 4%.
Short-term resistance at 0.8530 has so far kept a lid on the NZD/USD but, if this can be overcome, the tailwinds noted above may well carry the kiwi back up towards April’s 0.8630 highs.
Notably, last week’s gains in risk appetite have lifted the NZD/USD ‘fair-value’ range implied by our short-term valuation model to 0.8250-0.8850.
The most obvious near-term catalyst for potentially de-railing the NZD uptrend is strength in this week’s backlogged US economic data, September payrolls in particular. This would perhaps remind investors the US recovery is (or at least was) still occurring, and stop the rot in the USD.
However, this may be something of a tall order given the indicators for payrolls haven’t been all that flash and investors may downplay any strength in pre-shutdown US data.
In NZ, there is very little important event risk ahead of next week’s RBNZ OCR review. This week brings just migration and credit card spending figures today, and the September trade balance on Thursday. Across the ditch, market attention is focused squarely on Q3 CPI (0.8%q/q expected).
We think a significant downside surprise will be needed to put a pre-year end RBA rate cut firmly back on the agenda.
More important for the AUD, probably, will be the October Flash Chinese PMI on Thursday. The consensus expects a small fall from 51.2 to 50.4.
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Majors
The USD continued to dribble lower on Friday night, keeping the major currencies perky.
In relatively subdued trade, the high-beta AUD and NZD outperformed, and the EUR/USD hit 8-month highs above 1.3700. With currency and bond markets fairly quiet, equity markets hogged the limelight.
US indices made fresh all-time highs, amid upbeat earnings reports from Morgan Stanley, GE, and Google. The Dow Jones index rose 0.2%, with the S&P500 up a stronger 0.7%. Of the 99 S&P500 companies that have reported Q3 earnings to date, 60.6% have beat expectations. Solid corporate earnings may continue to support equities in the near-term with over 25% of S&P companies due to report this week.
In currency markets, USD selling was the main theme of last week as fiscal frustrations and a push back in Fed tapering expectations weighed on the greenback. On a trade-weighted basis, the USD finished the week around 1% weaker.
US bond yields wound up 11bps lower at 2.57%.
A Bloomberg poll published on Friday shows the median expectation among 40 economists is for tapering to begin in March, with completion expected by October.
Looking ahead, focus will revert back to ‘fundamentals’ this week and in particular the relative strength of the slug of back-logged US economic data due for release. This includes home sales, durable goods, trade data, retail sales, factory orders, and of course September non-farm payrolls.
The immediate risk facing the USD is for probably for some further slippage.
Investors may be tempted to look through any signs of strength in the US data given it was compiled before the US government shutdown. In addition, a mediocre September payrolls report on Tuesday would see tapering expectations pushed back even further.
Heading into payrolls, recall that September ADP employment disappointed (at just +166k) and that the non-manufacturing ISM employment sub-index dropped 4.3 points to 52.7.
The current consensus for headline payroll employment is +180k. The US unemployment rate is expected to hold at 7.3%.
Other news:
*FOMC uber-dove Evans effectively closes the door on an October taper – “since we are waiting I haven’t seen anything like what I thought it would take in order to get us to a ‘yes’ on tapering”.
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1 Comments
And domestic economic indicators suggest NZ economic growth is poised to accelerate towards 4%
A common misconception or a forecast right on the money?
I have my doubts until new data confirms a reversal in falling foreign NZ share ownership.
The latest sharemarket ownership figures, which have been compiled by Goldman Sachs, show that we are buying back the NZX.
Domestic investors now own 67 per cent of the market compared with 65 per cent a year ago, 64 per cent in 2010 and only 46 per cent in the mid-1990s.
The drop in overseas ownership from 35 per cent to 33 per cent over the past 12 months has mainly been due to the following transactions: Read more
What's it to be, follow the money or the talk?
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