NZ$ bouyed over 71 USc on positive initial US earnings results, but local confidence weak

By Mike Jones

It was a very mixed night for the NZD.

Early weakness proved short lived as reasonable performances in European and UK equity markets aided general sentiment towards risk.

With US equity markets also finishing the day in positive territory the NZD eked out small gains into the New York afternoon.

Demand for NZD versus AUD was seen from some macro accounts overnight, which also underpinned the local currency. While trading volumes remain light, the market remains cautiously upbeat about the short-term outlook for the NZD with a move closer towards 0.7130-50 seen as the risk right now. Then again, much still depends on the economic news, with fears of slower growth still lingering in the shadows.

The global news will, of course, be boosted the Corporate earnings reports from some of the largest companies in the US and their guidance for the coming quarter.

Alcoa unofficially kicked off the reporting season overnight when it reported slightly better than forecast earnings. Tech bellwether Intel reports on Tuesday followed on Thursday by reports from Google and JP Morgan.

On Friday GE, Bank of America and Citigroup will release their results.

Closer to home we have Australia’s NAB business survey (1:30pm NZT) today.

Before that, at 10:45am, we receive New Zealand’s Food Price Index for the month of June.

Any large moves in this – one way or the other – could yet fine-tune market estimates for Friday’s Q2 CPI report.

Also on the local news, we would point out the not-so-good results form Tony Alexander’s latest BNZ economic survey.

While we were always cautious about the degree of optimism in earlier business surveys, in relation to our conservative forecasts, we have been surprised by the degree of fall in confidence in the latest BNZ survey.

Majors

Europe was quick to build on Friday’s turn lower in EUR/USD and GBP/USD after both suffered during the Asian session. GBP/USD led the way down in early Europe after the break of the 1.5080 former support level and failed attempts to re-take said level in Asia. A decline to 1.4960 ahead of final UK Q1 GDP data saw little immediate reaction, but a larger than forecast deterioration in the UK’s Q1 current account deficit to £9.6bn from a £1.7bn deficit saw GBP/USD fall to an intraday low of 1.4948.

However, we believe a surge in FDI and portfolio flows into the UK in the financial account in Q1 was overlooked.

A more positive performance from stocks through the mid part of the European session helped GBP/USD rebound only to fail again at 1.5080 with slightly softer equities later in the session. An S&P report reaffirming the UK’s AAA rating but also its negative outlook sent GBP plunging late in the day.

GBP/USD fell back to 1.50, while EUR/GBP – which earlier had rebuffed attempts to rise through our resistance area of 0.8400-25 – rose from a session low of 0.8340 to 0.8370. S&P believes the UK’s medium-term economic growth forecasts are optimistic and is sceptical the UK government will implement its accelerated fiscal consolidation program. However, S&P says it could reverse the negative outlook if the UK government implements its fiscal program in the October Comprehensive Spending Review as planned. Our view is there may be risks on economic growth over the next few years, but there is negligible risk of the government failing to deliver the fiscal consolidation program outlined in the June Emergency Budget.

Outside of GBP, Monday was a generally low volume session with few drivers and an apparent lack of interest ahead of Q2 earnings and key Chinese GDP and industrial production data later this week. Having failed at 1.2720, we continue to see EUR/USD targeting the 1.2440-75 area, but concede we are probably range trading for now with EUR/USD pushing back up to 1.2580 from a European session low of 1.2550. As was the case on Friday the AUD and NZD struggled to hold up in early Europe.

It appears that some FX investors see the rising USD versus EUR and GBP as a sign of broader USD strength. The AUD, NZD and CAD managed to recover alongside equities midway through the session. USD/JPY slumped back after Asian gains following the DPJ’s poor showing in upper house elections alongside a decline in EUR/JPY. The latter fell back from 112.40 to 111.12 while USD/JPY slipped from an Asian high of 89.15 to 88.40.

* Mike Jones is part of the BNZ research team. All its research is available here.

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