By Mike Jones*
The NZD/USD soared to within a whisker of 27-month highs overnight. From around 0.7550 this time yesterday, the tailwinds of rising risk appetite and a broadly softer USD propelled NZD/USD to an overnight high of 0.7630.
“Growth-sensitive” currencies like the NZD have outperformed over the past 24 hours.
The combination of solid global data, strong corporate earnings and yesterday’s pledge from the US Fed to loosen monetary policy has seen global equity indices surge 1.0-2.1% overnight. As a result, our risk appetite index (which has a scale of 0-100%) climbed to 6-month highs above 68%. The upbeat sentiment was also reflected in rising commodity prices.
Oil prices jumped 1.5% to around US$83/barrel while the broader CRB commodity price index edged up around 0.7%. Against a backdrop of rising risk appetite and surging commodity prices, investors ditched “safe-haven” currencies like the USD, JPY and CHF in favour of “growth-sensitive” currencies like the NZD and AUD. From around 0.7570, NZD/USD climbed above 0.7600 for the first time in 12-months, underpinned by solid real money demand for NZD/CHF and NZD/JPY.
Looking ahead, there is a fair bit of local event risk to watch out for today. August retail sales will likely capture the most attention. We have our fingers crossed that total retail sales edged up 0.4% in August, with a 0.2% gain expected for the ex-auto series. The latest batch of REINZ housing statistics look set to continue a moribund theme.
The ‘news’ will thus be in how much worse the national data looks given the likely hit from the Canterbury earthquake. The BNZ manufacturing PMI for September and the June-year Crown accounts will round out a busy data day. All up, we continue to suspect solid demand for NZD/USD on dips towards 0.7560. Initial resistance will be found towards the 2009 high of 0.7640.
Majors
“Safe-haven” currencies like the JPY, CHF, and USD weakened overnight as upbeat data and buoyant equity market sentiment bolstered investors’ risk appetite. Yesterday’s announcement from the US Federal Reserve that extra monetary stimulus would be needed “before long” has helped invigorate stock markets over the past 24 hours.
European stocks jumped 1.5-2.1% overnight following gains of 0.1-1.5% in Asian stocks yesterday. US equity markets received an extra leg-up from upbeat corporate earnings.
Hot on the heels of solid results from CSX and Intel, JP Morgan reported a better-than-expected 23% increase in Q3 profits overnight. The S&P500 and the Dow Jones both rose around 1% to new 5-month highs. Meanwhile, the VIX index (a proxy for risk aversion based on the volatility of the S&P500) eased to 6-month lows around 18.5%.
The general backdrop of fading risk aversion and rising global equities encouraged investors to trim positions in “safe-haven” currencies like JPY, CHF and USD and top up on long positions in EUR, GBP, NZD and AUD.
From around 1.3920, EUR/USD climbed towards resistance around 1.4000, helped by Augusts’ encouraging Eurozone industrial production figures (1.0%m/m vs. 0.8%) expected. GBP/USD rose from below 1.5800 to nearly 1.5900 and AUD/USD made fresh 27-year highs around 0.9930. It’s worth noting, data yesterday showed China’s foreign exchange reserves surged US$194b from July to September, the fastest ever increase over a 3-month period. China’s reserves now total some US$2.65 trillion.
For those concerned China is maintaining an undervalued exchange rate, the data is likely to be a red rag to a bull. Indeed, the German economy Minister said overnight "China bears a lot of the responsibility for avoiding an escalation" in the “currency wars.”
Many will be hoping China takes a leaf out of Russia’s book. Overnight, the Russian central bank announced it was scaling down currency interventions as part of a move towards a more flexible, free-floating currency ¬– certainly a welcome development from a “currency wars” perspective.
For today, the current backdrop of fading risk aversion and buoyant equity markets is expected to keep the USD heavy. Short-term support is eyed on dips towards 76.90 on the USD index. A break through this level would pave the way for a deeper correction towards 76.00.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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