New Zealand, Australian dollars soar, 2010 highs in sights

Once again the commodity bloc currencies, including the NZD, are the stellar performers of the FX markets.

Once again gains by the NZD outpace the EUR and GBP despite their gains against the beleaguered greenback. Following the commentary on Capitol Hill by the Federal Reserve Chairman the contrast with views from our own central bank and of course the RBA is relatively stark and the capacity for policy tightening continues to underpin sentiment.

As we have noted this week while all our regions central banks see some uncertainty in the global environment there is confidence in their domestic situation which suggests if the global situation does not deteriorate then their currencies will see increased interest rate support.

Overnight the NZD has soared to the US72.5 cent level, in step with the AUD which is some 2 cents higher than yesterday’s levels, currently trading near US89.5 cents. The local market looks primed to challenge 2010 highs for the NZD at the US73 cent level as we wrap the week.

It’s been a week where eventually the investor community has shown some continued appetite to differentiate between those regions and nations saddled with fiscal issues and deflationary economies and those with central banks who have a somewhat brighter outlook in the immediate future and know their treasury cupboards aren’t bare.

Of course the stress tests on the European banking system remain as the last obvious hurdle of the week, these will now be published this evening NZ time allowing a full day of response in European and North American markets.

Majors

Despite the late sell-off in US stock markets after Fed Chairman Ben Bernanke’s downbeat remarks on the economy, Asian markets held up relatively well. The Nikkei index was down 0.62%, the Hang Seng up +0.50%, whilst the Shanghai Composite actually closed up more than 1%.

So, while there were some early nerves in Europe, equities swiftly moved into positive territory and the ’risk-on’ trade became popular once more. European data helped brighten the mood, with French consumer confidence unchanged at -39 rather than the slight decline which had been expected. Whilst its manufacturing PMI survey came in a touch weaker at 53.7, the service sector index gained half a point to 61.3.

In Germany, meantime, the manufacturing PMI jumped almost 3 points to 61.2, with the services index up 2.5 points at 57.3. For Euro land as a whole, both indices were up in July, with the composite index only just shy of its recent cycle high. EUR/USD rose more than a cent in the first two hours of the European day from 1.2742 to 1.2854 and with EU industrial orders showing a chunky 3.8% monthly increase in June, the Single Currency pushed on to regain the level of 1.2870/80. Remembering the price action earlier in the week, the move below EUR/USD1.2870 on Tuesday signalled an ‘outside day’ with a higher high and a lower low.

This had then turned into a decent resistance point on the upside and there was some stop-loss buying from faster model accounts on the move up through 1.2890 just as consensus-beating US home sales and house price data were released. Over in the UK, retail sales for June printed a better than expected +1.0% m/m on the back of some unusually warm and sunny weather and the start of the football World Cup.

This helps cement our call for a consensus-beating +0.7% for Q2 GDP on Friday, but failed to give much of a lift to the GBP, which was little changed against either the euro or the USD. There’s a growing realisation that Q2 will be as good as it gets for the UK economy, with the favourable combination of inventory rebuilding, government spending and household consumption unlikely to be repeated in the next couple of years.

With crude oil up towards $80.00 and gold up almost $10 to $1195 per ounce, it’s no surprise to see the ‘commodity currencies’ taking the prizes for the day’s top performance. AUD and NOK have done best over the last 24 hours but with the CHF close behind, there’ll be some anxious faces at the Swiss National Bank which has been fighting a losing battle over the last 6 months to weaken the Swiss Franc against the euro. EUR/CHF had rallied 7 big figures off its all-time low of 1.3074 but has given back more than 2 cents over the past three trading sessions.