By Raiko Shareef
NZ Dollar
The NZD/USD is 0.7% softer at 0.7860, on the back of broader USD strength.
The NZD continued to grind higher yesterday, pushing up toward 0.8780. Overnight though, the USD sell-off lost steam, and the majors gave back some of their gains.
Amid the cautious risk tone, the NZD has fallen heavier than the JPY, putting the cross back toward the bottom end of the range. We remain wary of a near-term break below 84.0, especially if investors continue to spurn risky assets.
We imagine that such a break would be relatively short-lived, and expect NZD/JPY to close the year closer to 85.0.
There are no local data releases today. We still see initial resistance at 0.8000, and support at 0.7800.
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Majors
The USD pared back some of its losses overnight, following the sharp drop following yesterday morning’s FOMC minutes. The Bloomberg Dollar Spot Index is 0.3% stronger, but remains 1.4% below the 2014 peak struck earlier this month.
In truth, currencies took a back seat while equity markets hogged the limelight. Yesterday’s 1.7% rally in the S&P 500 has been more than reversed, with the index down by 1.8% today. Most commentators point to concerns about the global economy’s outlook. Little wonder, too, given the relatively downbeat commentary emanating from the IMF, the ECB, and the Fed this week. Dismal scientists, indeed.
There are certainly broader tinges of caution evident in markets, reminiscent of the ‘risk-on, risk-off’ phases in recent years. In the currency space, the safe-haven JPY and CHF were relative outperformers, while the risk sensitive AUD and NZD were the biggest losers.
In terms of volatility, the VIX Index is up 18% to 18.4, its highest level since late-January’s emerging market rout. Crude oil continues to slide aggressively, helped by the weaker global demand story. Overnight, Brent traded below $90 per barrel for the first time since 2012.
The EUR was singled out by policymakers last night, with the IMF’s Christine Lagarde catching attention when she noted that there was a roughly 35% chance that the euro-zone would return to recession. These figures were announced earlier this week in the IMF’s forecast update, but it made for a catchy headline overnight.
ECB President Mario Draghi continued to lay it in, repeating that monetary policymakers stand ready to take further stimulatory action, should it be required. This will continue to fuel expectations that the ECB will soon be forced down the path of sovereign bond purchases.
The only piece of data out last night supported this assessment. German trade figures were abysmal, with both imports and exports significantly worse than expectations, with the trade balance, at €14.1b, disappointing analyst picks.
To round out our central bank speaker coverage, we note that Fed Vice Chair Fischer committed a slight faux pas by saying that the “considerable time” phrase in the Fed’s communication is somewhere between two months to a year.
The Fed has consciously tried to shift the debate from being calendar-based to being data dependent. This was a step backward, though not a particularly insightful one. It assigns a wide range around Fed Chair Yellen’s original (and retracted) six month comment. We expect the first Fed Funds Rate hike in June 2015.
For completeness, note that Australia’s now thoroughly discredited employment survey showed that the economy lost 30k jobs in September, at the bottom end of expectations.
Our NAB colleagues stress that one cannot put any faith in these monthly numbers until the survey is fixed. Other indicators suggest the labour market remains soft, and the fact that the RBA cannot get a complete read on it will simply make the hurdle for rate hikes even higher. The AUD dropped 50pts on the dot, and recovered it just as quickly. Since then though, AUD/USD is 0.8% lower at 0.8770.
Today sees Australian home loan data, and not much after that. A triplet of Fed speakers are due, but one suspects the market will pay them only passing attention.
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