QSBO unlikely to move the NZD, German factory orders fall more than expected, investors see USD overbought

By Raiko Shareef

NZ Dollar

The NZD has recovered lost ground in line with the other majors against the USD, with profit-taking the likely culprit.

NZD/USD climbed 0.8% to 0.7830.

News that Sri Lanka had suspended the sale of a small batch of Fonterra milk powder saw NZD dip lower yesterday morning.

Light trading conditions probably exaggerated this news’ impact, which looked to challenge 0.7700. This move was retraced as the day wore on.

Today sees the NZIER’s Quarterly Survey of Business Opinion, which we expect to be fairly robust.

Unless it proves to be a shocker, we doubt the NZD will key off that result to any significant degree. Investors are more concerned with the USD story than anything else.

Today, we eye initial resistance at 0.7850, and initial support at 0.7760.

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Majors

A bout of profit-taking on the USD looks to have been the main theme in a sleepy start to the week in currency markets. The broad Bloomberg Dollar Spot Index is 0.8% weaker, with the G10 set of major currencies all seeing gains against the USD.

After the jump following Friday’s solid US employment reports, investors are clearly wary of pushing the USD further into overbought territory. This reluctance was evident in the reaction (or lack thereof) to very disappointing economic data out of the euro-zone.

German factory orders crunched 5.7% m/m lower in August, more than reversing July’s punchy 4.9% gain (upwardly revised from 4.6% originally). Sure, some payback was expected, but not quite that much – the market expected a 2.5% fall. In fact, the read was worse than all 33 of the analysts polled by Bloomberg expected.

But despite this unequivocally negative result, the EUR failed to weaken. In fact, the currency’s refusal to soften saw it instead track the path of least resistance – higher. Having held station a whisker above 1.2500 post-payrolls, EUR/USD is now 0.9% stronger at 1.2630.

Without fresh US data to vindicate further USD strength, we suspect that the market is divided into two camps – investors who consider the USD overbought and in need of a correction, and those who are looking for better entry levels to get long USD as a medium-term play. We favour the former camp in the near-term, but the presence of the latter bloc should keep any correction relatively modest.

Today, the RBA will be in focus as it releases its October policy statement. While no one is expecting an adjustment to the cash rate (or any signal of change in the near future), observers will be looking for hints around any impending macro-prudential action, and the implications that might have for monetary policy.

Elsewhere, it is a fairly busy day, though no single event looks likely to be hugely market-moving. German and UK industrial production readings will be watched carefully, after last night’s softness. In the US, the JOLTS job openings index has gained attention as a component of Fed Chair Yellen’s labour market dashboard.

A swathe of US policy makers are due to speak, with the current FOMC represented by George, Kocherlakota, and Dudley. US Treasury Secretary Jack Lew is unlikely to garner as much attention as former Fed Chair Bernanke, who captured column inches last week after admitting that he had been denied mortgage re-financing. Commentators jumped on this as a brilliant (if overplayed) example of how strict credit conditions are in the United States.

All its research is available here.