Kiwi currency suffering from Aussie woes and pullback from recent outperformance

By Raiko Shareef

NZ Dollar

The NZD remains under pressure, though not thanks to any fresh news.

NZD/USD is 0.7% weaker this morning at 0.7760.

The steady drift lower over the past 24 hours can at least partly be attributed to the negative sentiment around the AUD.

NZD has been weighed down by association, partly helped by wariness of pushing NZD/AUD much higher.

Yesterday’s Q3 Building Work Put in Place figures were disappointing, posting a 1.5% q/q gain against a market pick of +2.6%.

We suspect the undershoot was more a timing issue than a genuine absence of building activity, but it raises the downside risk to Q3 GDP.

We suspect that investors will continue to view NZD in a negative light, in part thanks to our Trans-Tasman cousins but also because of NZD’s recent outperformance relative to its peers.

We eye support at 0.7710, ahead of the 2014-low of 0.7660. We pick initial resistance at 0.7800.

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Majors

The USD continues to gain ground, with disappointing services data out of Europe and a weak Australian growth report weighing on the EUR and AUD respectively.

There were swings and roundabouts within the set of European non-manufacturing (i.e. services) PMIs. The UK version surprised on the topside, jumping to 58.2 vs 56.5 expected. On the mainland, France unexpectedly slipped lower to 47.9, and Spain disappointed too. As a result, the composite euro-zone measure printed at 51.1 vs 51.4 expected. This disappointment helped the EUR slide the bottom of the G10 league table today, off by 0.6% to find precarious footing just above 1.2300.

The GBP outperformed thanks its better-than-expected services PMI print, as well as a rather upbeat mid-year economic review from UK Chancellor Osborne (i.e. the Autumn Statement). Growth projections were upgraded modestly, and the package included some income and housing tax breaks. However, we suspect this fillip in the GBP will be rather fleeting, as political risk builds heading into the May 2015 General Election. The emergence of the UK Independence Party has markedly reduced the likelihood of a cohesive coalition emerging from that election. We remain alert for opportunities to get short GBP ahead of that date.

Australia’s Q3 GDP report, released yesterday, was woeful. Printing at +0.3% q/q, it came in below the bottom end of the range of analyst expectations, and well below the median +0.7% pick. There were few (if any) redeeming features of the report, which emphasised yet again the drag that declining mining investment is having on the economy. This will continue to invite speculation that the Reserve Bank of Australia may revert to an easing bias once again. This is not our central scenario – we expect the RBA to remain on hold until at least late 2015. The AUD lost 60pts almost immediately, and sits 0.5% weaker against the USD this morning at 0.8400.

Tonight, the major event will be the ECB’s policy meeting. Having built up expectations of further easing in the past month with tough talk, we think ECB President is liable to disappoint. We think it is too soon to announce fresh measures, and early 2015 might be a more likely juncture. Should that be the case, we may see a small rally in EUR.

Ahead of that, Australian retail sales and trade data for October are due. After yesterday’s GDP report, investors will be watching closely for further signs of weakness.

All its research is available here.