by Mike Jones
NZ Dollar
The NZ dollar staged a striking bounce-back through the latter stages of Friday’s trading session, having been sold down to almost 0.8210 earlier in the night. It opens this morning around 0.8265.
Friday’s late resurgence in the kiwi ostensibly owes to some airtime given to RBNZ Governor Wheeler in a weekend newspaper. Wheeler said the OCR will need to rise next year, and that the tightening cycle could be worth 200bps. This should not have been news. The RBNZ has repeatedly told us rates are going up next year and their own official forecasts have 200bps worth of tightening in them.
Last week’s slightly dovish RBNZ statement saw us shift the timing of the expected first RBNZ rate increase to June 2014, from March. So far, the market remains unconvinced. OIS-implied pricing is still straddling March/April for the first hike. Looking ahead, there is a risk that upcoming local data, particularly housing data, nudges market pricing closer to our view, weighing on the NZD.
October housing data may well show some negative impacts from the RBNZ‘s LVR restrictions, reinforcing the bearish NZD positioning of (particularly offshore) investors.
We remain of the view that the NZ economic upswing is far more broad-based than just the Auckland housing market. Witness the circa-6% odd GDP growth implied by last week’s ANZ business survey. This being the case, NZD/USD weakness on stalling housing market activity will ultimately prove short-lived in our view, and we’ve kept our 0.8400 year-end forecast.
Still, we wouldn’t stand in the way of any near-term selling, particularly with momentum having switched to the downside. According to our momentum model, NZD/USD momentum will remain negative while the currency trades below 0.8365. The key near-term support level is 0.8240. Through this and the 0.8180 200-day moving average would become the next target.
For the coming week, commodity price data (ANZ index on Monday, dairy auction on Wednesday), and Q3 labour market statistics (due Thursday) will be the local focus. We’re expecting a small fall in NZ’s unemployment rate, to 6.3%.
Offshore, it’s US payrolls week, and where the risks may be tipped in favour of additional USD strength. Across the Tasman, keep an eye out for the RBA decision tomorrow, retail sales today, and employment on Thursday.
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Majors
The trend for a stronger USD continued on Friday. The narrow DXY index climbed 0.6%, to be up 1.9% for the week.
Hot on the heels of Thursday’s stellar Chicago PMI, the nationwide ISM manufacturing PMI impressed with a small gain (56.4 from 56.2 and 55.0 expected). The final Markit manufacturing PMI also made for pleasant reading, rising to 51.8 from the 51.1 preliminary outturn.
10-year US bond yields leapt from 2.55% to 2.62% in the wake of the data (2.50% at the start of the week), underpinning broad-based gains in the greenback. The European currencies once again took most of the strain. The EUR/USD and GBP/USD both lost 0.7%, ending the week at 1.3487 and 1.5925. USD/JPY meanwhile added 0.3% to 98.61.
Heightened speculation of ECB policy easing has also been weighing on the EUR over the past few sessions. Although euro area inflation is weak, broader European activity indicators remain on an improving trend. As such, we doubt we’ll see any fresh easing measures from the ECB this week (meeting Thursday). An ‘on-hold’ decision may see the single currency trim some of its recent losses.
In a week where there will be no shortage of market moving news and events, Friday’s US non-farm payrolls will, as usual, be the highlight. The consensus expects a relatively soft 125k jobs gain, reflecting the temporary negative effect of the government shutdown. While a weak number may be brushed off for this reason, a strong number (175k+?) would restore faith in tapering and blow more wind into the USD’s sails. In other words, the market reaction to payrolls could be biased towards a stronger USD.
Aside from payrolls, other key US data releases this week will be ISM non-manufacturing on Tuesday, and the preliminary estimate of Q3 GDP on Thursday. There’s also a slew of Fed speakers to keep an eye on.
Outside of the US, Thursday’s Bank of England meeting (no change expected), AU data and Tuesday’s RBA meeting, and China’s trade balance on Friday will all be important events for currency markets this week.
Other news:
*Chinese President Xi says he is confident China will show “sustainable and healthy economic growth.”
*China services PMI rises to 56.3 from 55.4 on the weekend – above expectations.
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