By Mike Jones*
The NZD/USD has spent the past 24 hours trading choppily inside a 0.7680-0.7780 range. Yesterday’s generally stronger than expected Q3 retail sales figures (0.7%q/q vs. 0.1% expected) provided the impetus for a brief test of the top end of this range.
Still, we caution that there was nothing in the data to indicate any underlying strength in retail spending. And, most importantly, the data look to be weaker than those built into the RBNZ’s forecasts for near term private consumption. After a brief bout of NZD/JPY selling knocked the currency from its post-retail highs, the NZD spent most of last night grinding higher.
The European sovereign debt crisis continued to hog most of traders’ attention. But the fallout was generally limited to selling of EUR/USD and EUR crosses, with sentiment in equity and commodity markets buoyed by M&A activity and surprisingly solid US retail sales figures (+1.2% vs. 0.7% expected).
Improving risk appetite and a spurt higher in NZD/EUR saw the NZD/USD claw its way from below 0.7700 to around 0.7780.
It’s worth noting, NZD/USD “fair-value” was knocked significantly lower last week. Indeed, according to our short-term valuation model, NZD/USD “fair-value” is now seen between 0.7500 and 0.7700.
This suggests the NZD/USD may struggle to sustain gains above 0.7800 in the short-term. With local event risk confined to just dribs and drabs of mostly second tier data this week, expect gyrations in global risk appetite and the state of play in European sovereign debt markets to dictate NZD direction in the short-term. Further deterioration on this front could spark a deeper NZD/USD correction towards 0.7450.
For today, initial support is eyed on dips towards 0.7700, with short-term resistance expected around 0.7840. Keep an eye out for the RBA’s November Board minutes, due at 1:30pm (NZT).
Majors
The USD strengthened against most of the major currencies overnight. However, the ‘commodity-linked’ currencies like AUD, CAD and NZD bucked the firmer USD trend, as equity markets and commodity prices rose.
As with most of last week, the focus for markets overnight was firmly on the European sovereign debt crisis.
The lack of any clear improvement on this front meant selling of EUR/USD and EUR crosses was again the dominant theme in currency markets.
Most concerning for investors were signs of contagion from Ireland’s sovereign debt woes to other troubled European states. Not only was the Greek budget deficit revised higher (to 15.4% of GDP from 13.6%), but the Portuguese finance minister said the risk of the country needing an EU bailout is now high.
ECB vice-president Constancio also suggested Ireland could use EU bailout funds to re-capitalise its ailing banks.
From above 1.3700, EUR/USD was sold down to below 1.3600, paving the way for broader USD gains. EUR/JPY slipped from above 113 to nearly 112.5 and EUR/GBP drifted from 0.8500 to around 0.8470. Another lift in US bond yields accelerated the firmer USD trend. Indeed, 10-year US Treasury yields rose around 5bps to 2.84% overnight – a three month high.
A group of 23 prominent US economists and investors launched a campaign calling on the Fed to drop its US$600b quantitative easing policy.
In addition, Richmond Fed President Lacker adopted a decidedly hawkish tone, warning of the inflation risks inherent in using monetary policy to target unemployment. Reflecting the stronger USD, GBP/USD was knocked from around 1.6150 to below 1.6100 and USD/JPY climbed from 82.40 to around 83.00.
In contrast, modest gains in equity markets and commodity prices helped the ‘commodity-linked’ currencies like AUD, CAD and NZD buck the firmer USD trend. Global equity markets recorded gains of 0.3-1.2% overnight and the CRB index (a broad index of commodity prices) ticked up 0.9%.
The week ahead offers plenty in the way of global data releases and official rhetoric to keep markets on their toes. Nevertheless, the Irish debt saga will likely take centre stage, with investors on alert in particular for any signs of contagion to other trouble sovereign states such as Portugal and Spain.
Should concerns continue to escalate, we wouldn’t be surprised to see the USD continue its recent rally.
Short-term resistance is eyed towards 78.80 on the USD index. Watch out for any headlines from the EU finance ministers meeting due to kick off tonight.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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