by Kymberly Martin
NZ Dollar
The NZD/USD has traded a path between 0.8090 and 0.8135 over the past 24-hours, sitting at 0.8110 at present.
There was a reasonable amount of volatility in the NZD/USD overnight as it was tossed around by Northern hemisphere data releases. It spike above 0.8130 after the release of a disappointing US ISM.
However, it soon returned to trade at 0.8110. We continue to see this as the lower end of its range. The release of a strong NZ labour market report tomorrow, and a solid US payrolls report at week end would be the likely catalysts to see the NZD/USD end the week higher within its 0.8100-0.8400 range.
The greatest downside risk is presented by further deterioration in risk appetite precipitated by emerging market concerns. Still, our risk appetite index (scale 0-100%) has dropped to 43%, its lowest level since June 2012, suggesting a lot of negative sentiment is now priced into markets.
The NZD/GBP outperformed overnight as the GBP suffered in the face of a disappointing UK PMI release. The NZD/GBP sits at 0.4970 this morning from 0.4930 last evening. The magnetism of the crucial 0.5000 level remains strong.
Meanwhile the NZD/JPY continues to be the victim of heightened risk aversion. As the USD/JPY broke below key support levels overnight, the NZD/JPY was also dragged lower. It sits at 81.90 this morning, its lowest level since mid-November. We continue to expect the cross to rebound once risk appetite improves and the market refocuses on fundamentals which sharply favour the NZD.
The key for the NZD/AUD cross today will be the meeting of the RBA. The Bank is widely expected to remain on hold as recent AU data has improved. We believe we have seen the cyclical highs on the NZD/AUD, above 0.9500, but near-term see support in the 0.9150-0.9170 window.
Domestically today, PM Key is scheduled to speak on NZ and the global economy. ANZ commodity prices will also be released.
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Majors
Risk appetite remained under pressure overnight as trans-Atlantic data disappointed. The JPY outperformed and the GBP was the worst performer.
Our risk appetite index (scale 0-100%) dropped to 43%, its lowest level since June 2012, as data disappointed on either side of the Atlantic overnight.
The biggest shock came from the US ISM early this morning (51.3 vs. 56.0 expected). It was likely at least partly attributable to extreme weather conditions. However, the market’s response was abrupt. Bond yields fell and equities plunging. The S&P500 is currently down 1.8%. The USD index fell from around 81.30 to sit at 81.10 this morning.
The market’s reaction function has shifted. At this point it appears more concerned about growth risks than less-loose Fed policy.
‘Bad news’ economically, is no longer ‘good news’ for risky assets, as it had been in the recent past. In this context Friday’s payrolls release will be critical. A solid reading will support the USD but ‘risky assets’ will likely be the greatest beneficiaries. This includes equities but also the NZD and AUD.
Currently, the AUD continues to find its feet, trading at 0.8780 this morning. Today, all eyes will be on the RBA meeting. The Bank is widely expected to keep rates on hold. However, despite recent improvement in AU economic data, we don’t think the RBA will feel the need to aggressively disavow the market’s pricing of around a 30% chance of a further RBA cut in the year ahead.
The GBP came under pressure overnight. Although the European PMI reading managed to deliver on expectations, at 54.0, the UK PMI disappointed at 56.7 (57.3 expected). This set the GBP/USD on a downward path. From 1.6420 last evening it trades just above 1.6300 currently.
Meanwhile the JPY continues to benefit from ‘safe haven’ flows in the backdrop of heightened risk aversion. Overnight, the USD/JPY broke through support at 101.80 to sit at 101.10 this morning, its lowest level since late November.
Tonight, US factory orders will be released and Fed members Lacker and Evans are scheduled to speak. It will be of interest whether they mention recent emerging markets turmoil as such considerations were notable by their absence from the Fed’s last statement.
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