By Mike Jones
Fading risk aversion and a softer USD underpinned a modest rally in the NZD overnight. NZD/USD climbed from around 0.7170 to almost 0.7240. Still, the NZD remains firmly in range-trading mode. Over the week, the NZD/USD has really just chopped around in a 0.7160-0.7250 range. Worries about the health of the European finance sector remain the dominant focus for currency markets.
Overnight, a better-than-expected Portuguese government debt auction and news of the Irish government’s plan to wind down debt-stricken Anglo Irish Bank spurred a modest rally in global equity markets. Improved sentiment towards the global economy was also reflected in a near 2% gain in the Baltic Dry Index (an index of shipping costs often used as a barometer of global trade). Oil prices ticked up 0.7% to US$74.5/barrel and the VIX index (a proxy for risk aversion) slipped below 23.5% from nearly 24% the day before.
Against this backdrop, “safe-haven” positions in currencies like the JPY, CHF and USD were trimmed in favour of “growth-sensitive” currencies like the NZD and AUD. Against a broadly softer USD, NZD/USD edged up towards the top end of its recent 0.7160-0.7250 range, helped by solid demand from real money and macro accounts.
Today’s June quarter construction and manufacturing data provide major cross checks on our forecast production-based GDP expanded 0.7% in Q2. We are looking for a 0.2% increase in manufacturing output and a small increase in total building work put in place as a substantial pick up in residential building (8.0%) collides with a 7.0% drop in non-residential activity.
It’s worth noting, our short-term valuation model suggests NZD/USD is broadly “fairly” valued at present. The model currently estimates a “fair-value” range in the NZD/USD of 0.7150-0.7350. In the absence of another meltdown in global equity markets, we suspect the NZD/USD will spend most of the rest of the week trading inside this range.
The USD weakened against most of the major currencies overnight as a mild improvement in risk appetite reduced demand for “safe-haven” assets. Concerns about the health of the Eurozone financial system receded somewhat following a successful Portuguese bond auction. €1.04b in funds were raised, with bids outstripping the offered amount by a factor of 2.6.
In addition, Ireland outlined a solution for winding down nationalised Anglo Irish Bank, offering investors some relief. Irish and Portuguese CDS spreads both edged down slightly, indicating less perceived risk of sovereign default. European stocks rallied 0.4-1.0% and the EUR/USD climbed from below 1.2700 to almost 1.2750. Still, EUR/USD failed to recoup even half of the previous day’s losses.
Not only did last night’s German industrial production figures disappoint (0.1%m/m vs. 1.0% expected), but lingering concerns about the European banking sector (ahead of next week’s release of Basel III capital requirements) kept the EUR heavy. Nevertheless, US stocks rebounded (the S&P500 recorded a 0.7% gain) and the VIX index (a proxy for risk aversion) fell, suggesting improved overall appetite for risk.
Accordingly, “safe-haven” currencies gave up some of their recent gains. Having earlier fallen to a fresh 15-year low below 83.50, USD/JPY rose to almost 84.00. Japanese authorities appeared to step up their rhetoric against the strong JPY overnight.
Finance minister Noda said "In the end, we will take decisive measures including intervention when needed." Markets took this morning’s release of the Fed’s beige book more or less in their stride. The Fed noted “widespread signs of deceleration” in the US economy in August, confirming investors’ suppositions that the US economy is in a slowdown phase, but is not yet stalling. The CAD took out the title of strongest performing currency overnight.
As expected, the Bank of Canada raised its policy rate 25bps to 1.0%. However, the tone of the accompanying statement was judged to be less dovish than expected, with the BoC leaving the door open to further tightening. In response, USD/CAD dived to nearly 1.0360, from around 1.050 prior to the decision.
Looking ahead, mostly second tier data occupies the calendar for the rest of this week, and tonight’s Bank of England policy announcement should contain few surprises. As such, we suspect concerns about the European financial sector will remain front-of-brain for markets. Given this, rallies in the EUR/USD towards 1.2900 are expected to be short-lived in the near-term.
* Mike Jones is part of the BNZ research team.