by Kymberly Martin
NZ Dollar
The NZD weakened against a strong USD overnight, along with all of its peers. It sits at 0.8330 this morning.
There was little news domestically to drive the currency over the past 24-hours. Rather, overnight it was all about USD strength. As the USD returned to favour the NZD was a casualty along with most of its comrades.
Resistance for the NZD/USD, just above the 0.8400 level, appears intact for now. The NZD/USD has returned to trade at 0.8330 this morning.
The local focus today will be the AU employment report, in the absence of scheduled NZ data releases. Any disappointment in the AU data, which resulted in AUD weakness, could see the NZD/USD dragged lower in sympathy. But it would likely see strengthening of the NZD/AUD cross.
This morning the NZD/AUD sits around 0.9350 after reaching new cyclical highs intra-night, close to 0.9400.
While momentum still clearly favours the cross we believe valuations are now stretching the well-known divergence in Trans-Tasman fundamentals.
Tonight, sentiment toward the USD will be in the hands of US data releases (CPI, Philadelphia Fed survey and the NAHB housing index) along with further US earnings reports.
If positive USD sentiment extends further it could see the NZD/USD moving back toward the middle of its broad 0.8100-0.8400 range of recent months. Initially, support is eyed at 0.8310.
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Majors
The USD strengthened against all its peers overnight. The USD index sits just above 81.00 this morning.
Overnight, Bank of America provided the latest positive surprise in the US Q4 earnings reporting season. We are still in the very early stages of the season but so far results on average have been strong. The US Empire Manufacturing survey also came in well above expectation (12.51 vs. 3.50). In addition, the World Bank issued upward revisions to its 2014 global growth forecasts. It now sees 3.2% growth this year (3.0% previously) up from 2.4% in 2013.
This all helped drive interest in the USD and boost equity returns. The Euro Stoxx 50 closed up 1.6% while the S&P500 is currently up 0.6%. Commodities also extended their recent gains. The CRB global index rose a further 0.60% overnight. The WTI oil price also rose 1.8% overnight to trade at $US94.27/barrel this morning. This was likely assisted by a report overnight showing US crude inventories fell to the lowest level in 22 months.
While the USD index traded its steady upward path, the EUR/USD declined. From 1.3640 last evening it trades around 1.3590 this morning.
The USD also strengthened against the JPY. The USD/JPY sits just below 104.70 this morning. It has almost completely revered its plunge lower earlier in the week. The key level for the USD/JPY remains the early-year highs around 105.40. Ultimately we see the USD/JPY pushing above this level to reaching 107.00 by mid-year.
The AUD was not immune from USD strength. The AUD/USD has fallen to trade around 0.8900 this morning. All eyes are now on the AU employment report to be released at 1.30pm (NZT) today. A disappointing result would likely raise expectations of a further RBA rate cut (currently priced at around a 45% chance). This would likely see the December lows on the AUD/USD, circa 0.8820, tested.
Our NAB colleagues expect today’s AU unemployment rate to remain steady at 5.8%, in line with consensus. However, expected further deterioration in the labour market in the year ahead contributes to their expectation for a further RBA rate but by mid-year. Consistent with this, the AUD/USD is seen lower by mid-year, at 0.8700.
Tonight’s data highlights will be the final reading of Eurozone and US December CPI, along with the US Philadelphia Fed survey and NAHB housing index. The market will also continue to focus on the results of the US Q4 earnings reporting season.
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