By Mike Jones
The NZD has started the week where it left off last Friday – on the front foot. Against a still buoyant global backdrop, NZD/USD made a further probe to the upside overnight, to hit 0.7340 for the first time since early August.
There wasn’t a lot going on in offshore markets overnight. But, as we flagged yesterday, the weekend’s release of upbeat Chinese data and less onerous-than-expected Basel III capital requirements ensured investors’ risk appetite remained well supported.
European and US stock markets followed the strong lead from Asia and posted gains of 0.6-1.2%. Meanwhile, our risk appetite index (which has a scale of 0-100%) increased from 57.5% to 58%. Along with a small dip in US bond yields, a clear reduction in “safe-haven” demand spurred a broad-based decline in the USD.
Amongst the majors, EUR/USD led the gains against the broadly softer USD thanks to a sharp upward revision to the EU commission’s 2010 Eurozone growth forecasts. EUR/USD climbed nearly 1½ cents to nearly 1.2890. Strong gains in the EUR, combined with interest from a mix of speculative and momentum accounts to add to long NZD positions saw NZD/USD climb from sub-0.7300 to 0.7340 overnight.
Looking ahead, we suspect positive momentum and buoyant risk appetite should limit dips in NZD/USD to around 0.7250 in the lead up to Thursday’s RBNZ statement. Strengthening this view, our short-term valuation model suggests the NZD/USD is not yet “overvalued”. In fact, the NZD/USD is close to the middle of the model’s estimated 0.7200-0.7400 “fair-value” range. Initial resistance will be found towards July’s 0.7395 high.
For today, watch out for August REINZ housing market data (10:00am) and July retail sales figures (10:45am). We are very much at the low end of market expectations for retail sales, picking -0.5%m/m, compared to the markets’ flat expectation.
The USD was shunned overnight as generally buoyant risk appetite sapped demand for “safe-haven” currencies. The USD index dived over 1% to below 82.00.
There wasn’t a lot of news for markets to digest overnight. Instead, investors simply bathed in the afterglow of the weekends’ upbeat Chinese data and widespread relief the Basel III capital requirements were not as onerous as earlier feared.
European and US equity markets posted solid gains, with financial stocks leading the charge higher. The Euro Stoxx 50 rose 0.9% and the S&P500 climbed 0.7%. Meanwhile, the VIX index (a proxy for risk aversion based on the volatility of the S&P500) opened the week lower around 21.50%.
Firming risk appetite and easing fears about a hard landing for the Chinese economy encouraged investors to trim “safe-haven” positions in currencies like the USD and JPY. A 3-5bp dip in US bond yields further undermined USD sentiment, dragging USD/JPY from 84.20 to nearly 83.60.
Still, it was the EUR that led the way higher for most of the major currencies. Not only did rising risk appetite add support, but the EU Commission raised its 2010 Eurozone growth forecasts to 1.7%y/y, from the 0.9% it forecast in May (to be more or less in line with those already released by the ECB). EUR/USD climbed steadily from 1.2750 to around 1.2880. With double-dip recession fears still hanging over GBP, EUR/GBP was propelled from 0.8300 to almost 0.8360.
It’s worth noting, the CNY was yesterday allowed to hit the highest level since China first removed the USD peg in 2005. While this partly reflects easing concerns about the strength of Chinese growth following the robust August data, it is also seen as a goodwill gesture amid ongoing US pressure to let the CNY rise. However, at 6.7618, we note USD/CNY is only around 1% weaker than June, when China announced the CNY will be allowed to gradually appreciate again.
Looking ahead, the tone of this week’s data will be important in determining whether investors’ healthy risk appetite can be sustained, and hence whether downward pressure on the USD remains in place. US retail sales and consumer confidence, along with various regional manufacturing reports, will no doubt receive the most attention. On Wednesday, Japan’s ruling party will decide whether to keep current PM Kan in the top job or replace him with challenger Ozawa. Should Ozawa get the job, expect the JPY to come under pressure given he has often advocated intervention to curb the JPY strength.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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