By Mike Jones Having reached 0.7440 yesterday afternoon, a broad strengthening in the USD has shaved around a cent off the NZD/USD overnight. At around 0.7330, NZD/USD is now pretty much back to where it started the week. Yesterday's retail data looked as though things were holding up, but fundamentally suggested something a bit softer. September quarter's seasonally adjusted increase in ex-auto volumes, of 0.5% received a hefty helping hand from a burst in appliance sales. And that in turn looks suspiciously as if it was fuelled by heavy discounting. So, all in all, some mixed messages for the NZD. After initially lurching lower, a quick reassessment of the numbers saw the NZD/USD quickly reverse its losses, with gains continuing after the upbeat Australian jobs data. Australian employment rose by 24,500 in October, confounding forecasters expecting a 10,000 fall. The data had Aussie markets scrambling to price in a greater chance of an RBA rate hike in December. With odds of such being raised to nearly 90%, the AUD surged to a fresh 15-month high of nearly 0.9370. The NZD was happy to draft off the AUD slipstream, and briefly headed up to around 0.7440. However, the highs in the NZD didn't last long. Overnight, a broad-based strengthening in the USD knocked some of the wind out of the NZD. A lacklustre performance across global equity markets and downbeat comments from the WTO Director General tempered appetite for risk, which increased "˜safe-haven' demand for the USD, at the expense of "˜growth-sensitive' currencies like the NZD. An easing in commodities prices (the CRB index is down around 1.3%) added to the mix, such that the NZD/USD eventually slipped back to around 0.7320. For today, we suspect dips in NZD/USD will be limited to 0.7275. Initial headwinds are seen towards 0.7400. Keep an eye out for October REINZ housing market statistics which are due to be released sometime today. The USD strengthened against all of the major currencies overnight. With no notable data releases to provide direction, sentiment tended to be dictated by equity markets and more comments from officials. US stocks ended their 5-day winning streak. A tepid profit outlook from US consumer giant Wal-Mart raised fears about the outlook for US consumer spending, and this weighed on equity market sentiment. The S&P500 is down around 0.5%, while the DAX and the FTSE are about flat. The dour mood in equity markets saw appetite for risk ease off recent highs. The VIX index of risk aversion rose above 24% from around 23% the night before. Adding to the cautious climate, WTO Director General Lamy was on the wires questioning whether or not the global recovery "would be sustainable six months or a year from now." The backdrop of weaker equities and deteriorating risk appetite was seen by investors as a good opportunity to take profit in the likes of EUR, CAD and AUD, after strong gains earlier in the week. Noticeable falls in oil and gold prices (of 2.8% and 1% respectively) probably added fuel to the fire. After flirting with 1.5000 early in the night, EUR fell back to nearly 1.4850. Meanwhile, USD/JPY rose above 90.50 for the first time this week. GBP was somewhat insulated from the strengthening USD, holding above 1.6500. Steady selling of EUR/GBP, rumoured to be related to mergers and acquisitions activity, provided a boost for GBP overnight. It is worth nothing, speculation seems to be rife that China will allow the CNY to appreciate in future. Not only did the PBOC say it intends "to improve the yuan exchange rate formation mechanism", but political pressure appears to be ramping up as well. A statement from an APEC meeting in Singapore endorsed a movement towards "market-orientated" exchange rates "“ which was widely interpreted as directed at China. US President Obama is also visiting China next week, in which currencies are expected to be discussed. According to non-deliverable forward contracts, the implied expected appreciation in the CNY over the next 12 months is a modest 3.7%. Despite last night's bounce, the weakening USD trend still appears to be in play. Growing confidence in the global recovery, combined with last week's Fed commitment to keep rates lows for "an extended period", should keep the USD heavy in coming sessions. Solid support on the USD index is expected towards 75.00, while near-term bounces should be limited to the 76.50 region. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.
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