Mike Jones sees a subdued NZ$ ahead of RBA decision; fresh talk of US money printing
By Mike Jones*
As expected, the NZD had a relatively subdued night’s trading with markets thin owing to the US holiday.
A positive day for Asian bourses helped the NZD recover from its session lows and this continued in early London, with the local currency pushing above 0.6925 at one point.
However, this proved short lived with a weaker AUD and supply in GBP eventually weighing on the NZD/USD. With ongoing concerns about the global economy, growth-sensitive currencies are not likely to appreciate significantly.
Expect the 0.7050 region to cap any recovery.
Yesterday saw the release of the latest Barfoot Auckland house sales data which surely dashed hopes the May Budget would rid the housing market of any uncertainty.
While the headline results looked stale enough, the seasonally adjusted fall in sales of 15% suggested things are actually getting worse.
This further justified our recent downgrade to the recovery we expect in the construction sector, as outlined in our research article last week.
On the domestic calendar this morning we have the Quarterly Survey of Business Opinion, which is expected to be generally solid, as other business surveys have been of late. In particular, however, it will be crucial for testing the degree of GDP pick-up in Q2/Q3, as well as whether spare resources are being soaked up.
In this respect, the “difficulty in finding staff” series will be important, given the recently volatile “official” labour market data. Also bear in mind QSBO pricing intentions will probably be starting to reflect the impending (1 October) GST hike.
The local market will also be keen to see the RBA rate decision on due at 4.30pm NZT. While the RBA is expected to keep rates on hold, the market will pay close attention to see if the RBA shares any of the market’s concerns that global growth is starting to taper off. No doubt local rate markets will be watching this with interest.
While noted 'RBA watcher' Terry McCrann tells us they could go up or down, he still looks firmly in the 'but neither yet' camp.
Majors
Major currencies have been confined to narrow ranges in a quiet European session Monday with the US observing its 4th July holiday. The USD spent the night consolidating recent losses in low volume trade, pushing less than 1% higher against the most major currencies.
However, with risk appetite still muted and European equities posting small losses, the USD eased lower against the JPY and could not hold early session gains against the CHF. EUR/USD edged down from an early European session peak of 1.2565 to 1.2510 despite the publication of slightly stronger than forecast service sector PMI for June. A stellar performance from Germany offset weakness in France and Italy with Euro Zone service sector PMI at 55.5, up from 55.4 in May.
In addition, while Euro Zone May retail sales data was a fraction below forecast, upward revisions to past month’s data saw the annual rate pick up to +0.3%. However, it was GBP that moved the most with GBP/USD dropping a cent from 1.5200 to 1.5090 before reclaiming the 1.5100 handle. UK service sector activity in June grew at a slower pace than anticipated with the PMI index registering 54.4 against a forecast 55.0. The index is now well off its February peak, of 58.4.
The softer data combined with weekend press reports the UK coalition government is looking at prospective 40% departmental spending cuts and that global demand for German export orders is surging. These factors pushed EUR/GBP up from 0.8255 to 0.8295.
With few key data releases on the agenda the week ahead for FX majors is likely to be dominated by growing speculation the USD’s inverse correlation with risk and equities has come to an end and that the USD will fall further, regardless of weaker stocks and commodities.
Our view is the current EUR bounce is being led by position unwinds and once this fades the EUR will look less strong.
However, the current run of softer US economic data and speculation the Fed may have to return to quantitative easing will need to run its course before the USD can find its feet against European currencies. In that sense we continue to look for possible gains in EUR/USD into the 1.27-1.28 area, but remain mindful that a break back below 1.2440 will likely lead to more aggressive EUR selling.
The big test for the EUR will be the publication of European bank stress test later in the month. We retain a sceptical view the tests will fulfil the market’s definition of realistically stressful environments and remain wary any need to re-capitalise European banks.
On the DXY index we note declining long-term support from January 2002 at 83.85.
* Mike Jones is part of the BNZ research team. All its research is available here.
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