Opinion: NZ$ weakens after positive Australian GDP data

By Mike Jones The NZD has been the worst performing currency over the past 24 hours. Despite a generally softer USD, the NZD has tracked largely sideways around 0.6750. There was a general lack of direction in currency markets last night. However, another disappointing day in equity markets (US and European indices are all around flat), and weaker-than-expected US data (ADP employment report and factory orders) kept investors in a cautious mood. Our index of risk appetite (which has a scale of 0-100%) remained at 38% - the lowest level since mid-July. With risk appeitie shaky, investors sought out the relative safety of the JPY. In fact, JPY was the strongest performing currency last night. As a result, NZD/JPY dribbled lower from around 63.00 to below 0.6200. Stready selling of NZD against AUD also helped weigh on NZD/USD. Yesterday's stronger-than-expected Q2 Australian GDP data (+0.6% q/q vs +0.2% expected) served up another reminder of the contrasting macroeconomic positions of the antipodean economies. Heavy NZD/AUD selling after the release continued into the offshore session such that around 1 cent has been carved off NZD/AUD in the past 24 hours. Steady demand for AUD against NZD from both model and speculative accounts tended to drag on on NZD/USD, which dipped below 0.6700 at one point overnight. Nevertheless, a late patch of USD weakness towards the end of the night helped lift NZD/USD off its lows. The August ANZ commodity price index is due for release today. International dairy prices have rebounded strongly in recent months, but the strengthening currency has provided a strong offset for farm-gate returns. However, today's data is unlikely to shake the NZD out of its recent 0.6700-0.6800 range. Global sentiment and risk appetite will continue to dictate the near-term fortunes of the NZD. The past 24 hours have been a bit of a mixed bag in currency markets. Overall, it appears investors are content to sit on the sidelines ahead of important events later this week. It was another disappointing day in global equity markets. Most of the major US and European indices were either flat or down slightly following the sharp falls the day before. Generally weaker-than-expected US data tended to weigh on equity markets. The ADP employment report showed US employers cut 298,000 jobs in August. While this was an improvement on July, it was worse than the 250,000 the market had expected. Analysts are now pencilling in something similar for the non-farm payrolls report due out on Friday night. In a similar vein, US factory orders managed to eke out just a 1.3% gain (2.2% expected). And there was nothing really for markets to get excited about in the August FOMC minutes. With stock markets looking shaky and financial sector concerns still fresh in investors' minds, risk aversion remained up around recent highs. The VIX index (a measure of S&P volatility, used as a proxy for risk) hit 29.5% at one point during the night, the highest level since early July. Heightened risk aversion saw JPY gain against most currencies last night on the back of increased demand for "safe haven" currencies. Indeed, USD/JPY fell to nearly 92.00 - its lowest level since February this year. While the JPY was one of the strongest performing currencies overnight, a late weakening in the USD allowed a few of the majors to post small gains. EUR lifted off recent lows around 1.4200 as the revised estimate of Q2 Euro-area GDP was confirmed at -0.1% (with France and Germany recording positive growth). Meanwhile, the chairman of the European finance ministers meeting said the "the worst is over for the time being" but the time had "not yet come to withdraw fiscal stimulus". The strongest performing currency over the past 24 hours has been the AUD. Yesterday's stronger-than-expected Australian GDP data (0.6% vs. 0.2% expected) prompted markets to further bring forward the timing of expected RBA hikes. This helped propel AUD to above 0.8350 from below 0.8250 the day before. Market pricing is now consistent with the first RBA hike coming in November, with a 50% chance of an earlier (October) tightening. Ahead of payrolls on Friday, the next major focus for markets is the ECB interest rate decision tonight. While nobody expects a change in the policy rate (1%), the ECB is expected to sound more positive on the economic outlook given recent encouraging signs. Failure to do so could see EUR test support around 1.4100. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.