by Kymberly Martin
NZ Dollar
The NZD/USD sits a little higher at 0.8300 this morning, after dipping below 0.8260 overnight.
A weaker USD helped buoy the NZD/USD. Our momentum model maintains a neutral position on the pair at present but would move to a long position at 0.8335.
A test of this key resistance level (the December high) may be in the offing today.
However, there is nothing scheduled on the domestic calendar to directly influence trading today.
The NZD/AUD is a little stronger this morning.
Having dipped below 0.9120 yesterday afternoon it now sits close to its highs for the night, around 0.9260. Key resistance remains at the mid-December highs just above 0.9300.
Our momentum model has remained short the AUD/NZD since mid-November, a position that has returned 4.4% to date.
However, we continue to caution the cross is trading some way above what our fundamental model indicates is ‘fair value’. This model takes into account relative 2-year swap spreads, business confidence and commodity prices. It sees a current NZD/AUD ‘fair value’ at 0.8500-0.8700.
That said, we do see wider NZ-AU 2-year swap spreads ahead as the RBNZ begins to hike rates while the RBA has the potential to cut rates again.
We see 2-year swap spreads peaking around 140bps mid-year, from 97bps currently. It is also relatively quiet on the AU agenda today, although the November trade balance will be released at 1.30pm (NZT).
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Majors
Markets were relatively quiet at the start of the first full week of trading for the year, overnight. The JPY was the strongest performer while the USD index declined.
After fairly range-bound trading earlier in the evening, a disappointing US ISM Non-manufacturing release (53.0 vs. 54.7 expected) provided the catalyst for a softer USD index. It trades a little lower at 80.60 this morning, with the JPY being a key beneficiary. The USD/JPY has declined to trade just below 104.00 this morning.
The EUR/USD bounced off its recent lows overnight. The final release of the Eurozone December Services PMI came in line with expectation at 51.0, as did German CPI at 1.4%y/y. Tonight Eurozone December CPI will be released. A 0.8%y/y outcome is expected, well below the ECB’s target. This will give the Bank plenty of food for thought ahead of its meeting on Friday.
There is room for further stimulatory measures from the ECB, though consensus does not expect it to cut its cash rate, which is already at 0.25%. The EUR/USD currently trades at 1.3640.
The GBP/USD suffered a short-lived fall after the release of a disappointing UK December Services PMI (58.8 vs. 60.3 expected). Still, the UK manufacturing activity is expanding at a pace not seen since March 2011 and the service sector is expanding at a quarterly pace not seen since June 1997. Putting this together, we still expect to see strong growth in Q4 2013. This could see the UK economy growing by 2% over 2013 as a whole, which would leave it at its strongest growth rate since 2007. The GBP/USD sits at 1.6410 this morning.
Tonight, aside from Eurozone CPI, German unemployment and retail sales will be released, along with the US trade balance.
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