by Mike Jones
NZ Dollar
It’s been a fairly choppy ride in the NZD/USD over the past 24 hours. It’s all been for nothing though, with the kiwi opening this morning pretty close to where it was this time yesterday, around 0.8270. Despite being tested several times, key support around 0.8240 continues to hold.
There’s been no lasting fallout on the currency from yesterday’s RBNZ meeting. To us, there was only one point of difference in yesterday’s statement compared to the RBNZ’s September missive and that was the acknowledgement that the strong NZD is threatening to postpone the RBNZ’s tightening cycle.
Our expectation of ongoing NZD strength means the balance of risk is very much skewed in the direction of delay. This is why we yesterday formally pushed back the timing of the expected start of the tightening cycle to June, from March.
Local interest rate markets remained unconvinced. Market pricing for the first RBNZ rate hike has barely budged, and continues to straddle March/April. This is perhaps why we didn’t see a bigger NZD reaction to the RBNZ statement. Yesterday afternoon’s stellar October ANZ business confidence survey, ostensibly consistent with 6% NZ GDP growth, certainly argues for earlier rate hikes.
Overnight, the NZD was largely side-lined. All eyes were on a collapse in the EUR/USD and attendant USD strength. The NZD managed to hold up better than most against the firmer USD though, reflecting solid NZD/AUD and NZD/EUR buying. The latter has reclaimed a foothold above 0.6050, having dipped below 0.6000 in the past few days.
For today, aside from Aussie PPIs and PMI (yawn), the Australasian data calendars are bare. Attention during the local session will instead be on October Chinese manufacturing PMIs due at 2pm (official) and 2:45pm (HSBC).
A further tick up is expected for both (51.2 official, 50.7 HSBC). Once again, the risk is probably for a stronger than expected China numbers, which would blow wind into the NZD and AUD’s sails. Broader USD sentiment will depend on the relative strength of tonight’s US ISM manufacturing index (55.0 expected, from 56.2 in September). Near-term support for the NZD/USD remains at 0.8240, with initial resistance at 0.8315.
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Majors
A collapse in the EUR and associated weakness in European currencies (SEK, NOK, and CHF) has been the story of the night in FX markets. In a reversal of fortunes earlier in the week, the ‘pro-risk’ currencies (CAD, AUD, and NZD) have outperformed their European counterparts.
Outside of currency markets, overnight price action was fairly listless and erratic. Equity market sentiment was mixed, with most of the major bourses flitting a few points either side of flat. The VIX index (a proxy for risk aversion) further eased off the week’s highs (to 13.4% from 14.4%). Commodity prices, meanwhile, mostly lost ground. The CRB index slipped 0.6%, driven by some big falls in precious metals prices (silver -3.7%, gold -1.5%).
In FX markets, US and European data formed a perfect storm for the EUR. US data all printed on the stronger side of expectations, most notably a jaw dropping surge in the Chicago PMI (65.9 from 55.7, 55.0 expected).
In stark contrast, European unemployment disappointed expectations, rising to an all-time high of 12.2% (12.0% expected). Making matters worse, Euro area inflation recorded a shock drop to a four-year low of 0.7%y/y (1.1% expected), fanning speculation the ECB may yet need to roll out additional easing measures.
The EUR/USD was jammed from 1.3740 to below 1.3600 in the wake of the data as EU-US interest rate differentials moved sharply lower (US 10-year yields up 5bps to 2.55%). The SEK, DKK, NOK, and CHF were all dragged lower in sympathy. However, the NZD, AUD, CAD, and GBP have been able to resist the general trend for a firmer USD, the latter no doubt buoyed by heavy EUR/GBP selling (the cross is down a bit over 1%).
Looking ahead, we may see the EUR continue to dribble lower in the near-term, with ECB President Draghi now seen as adopting a more dovish tone at next week’s policy meeting. However, we doubt he will explicitly offer up a rate cut or LTRO-style liquidity easing given the broad improvement in European activity data. This may limit the EUR/USD’s losses to support around 1.3465. Note that our momentum model is clinging onto its EUR/USD long position, but the stop/loss is now quite close at 1.3584.
Other news:
*BoJ keeps interest rates and asset purchases unchanged, as expected. The money base target for 2014 was held steady at ¥270t.
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