by Mike Jones
NZ Dollar
After putting up a something of a fight yesterday, the NZD sell-off resumed overnight. In fact, the NZD/USD’s ¾ of a cent slide (to 0.8350) has been enough for the kiwi to take out the title of the weakest performing G10 currency of the past 24 hours.
The good vibe from yesterday’s solid Chinese manufacturing numbers (October Flash PMI rose from 50.2 to 50.9 – a 7 month high) didn’t prop up the NZD and AUD for long. The Australasian currencies both lost ground overnight; the AUD/USD sliding just short of ½ cent to 0.9620, and the NZD/USD falling ¾ cent to 0.8350.
The underperformance of the NZD reflects: 1) additional NZD/AUD selling from macro and technical accounts following the break of 0.8745 support on Wednesday (currently 0.8680), 2) the slow escalation of worries about Chinese policy/liquidity tightening. Short-term money market rates crept higher again yesterday, but remain way below June highs, and 3) a nasty night for industrial metals prices (aluminium down 1.9%, copper down 2.2%).
In contrast to the antipodeans, the EUR continued on its merry way higher overnight.
Shrugging off some weaker manufacturing data, the EUR/USD rose to fresh 2-year highs above 1.3800. As a result, NZD/EUR has slumped to 0.6050 this morning, a full 1.5 cents below where it started the week.
The weakness may continue near-term, particularly with the EUR the key beneficiary of USD weakness at present. But very solid support will be found at the bottom end of the NZD/EUR’s recent 0.5800-0.6250 range. We’d look to buy dips in the 0.5800-0.5900 window.
For today, there’s not a lot of data and events for the NZD to trade off. While leveraged and speculative accounts may continue to lean on the kiwi, support should be found around 0.8320. Notably, momentum hasn’t yet switched convincingly to the downside. Our momentum model would only cut its NZD/USD long position on a break through 0.8267.
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Majors
It’s been a relatively choppy and mixed session in currency markets. The trend for a softer USD broadly remained intact. However, USD weakness was only really evident against the European currencies (NOK, SEK, GBP, and EUR). The ‘risk-sensitive’ AUD, CAD, and NZD underperformed.
Investors were a little torn overnight. Overall, the economic data of the past 24 hours has been a shade disappointing. What’s more, nagging worries about tensions in Chinese money markets continue to chip away at risk appetite (7-day Chinese repo rates hit 3-momth highs around 5%).
However, positive US earnings reports and the expectation of ongoing central bank stimulus have helped shore up global growth sentiment. As a result, most equity indices have ended the night in the black (S&P500 +0.3%), and the VIX index (a proxy for risk aversion) has slipped lower again (currently 13.2%).
In currency markets, a decidedly soft October preliminary US Markit PMI (51.1 vs. 52.5 expected, lowest since October 2012) provided some fleeting headwinds for the USD. The EUR/USD led the gains, climbing to fresh 2-year highs above 1.3800. The GBP/USD joined the fray, rising from 1.6160 to almost 1.6220. Still, gains in the NOK and SEK outstripped everything as their respective central banks maintained a ‘steady as she goes’ policy stance.
Technically, October’s European PMIs disappointed expectations (composite index 51.5 vs. 52.4 expected) but investors were happy to play up the positives. The index level suggests the expansion in the European manufacturing sector is continuing and is consistent with a second consecutive (~0.2%q/q) expansion in euro area GDP.
Looking ahead, we’re expecting a solid set of UK Q3 GDP figures tonight (NAB forecast 1.0%q/q vs. 0.8% consensus).
A result on our expectations would probably be enough for the GBP/USD to break above its recent 1.6265 highs. In the US, investors are hopeful tonight’s durable goods and consumer confidence data can shake off the weakness showing up in other US indicators. Disappointment here would see the trend for a weaker USD continue.
Other news:
*Swedish Riksbank leaves rates unchanged at 1% (4-2 vote), as expected.
*Norges Bank also keeps rates on hold at 1.5%, also as expected
*US jobless claims +350k vs. 340+ expected.
*Bank of England eases bank liquidity rules.
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