By Mike Jones*
The NZD/USD has spent most of the past 24 hours consolidating in a 0.7320-0.7390 range.
For the most part, the NZD tracked gyrations in risk appetite and global equity markets last night.
Earlier in the night, upbeat European economic data and solid profit announcements from UBS and Deutsche Bank buoyed optimism about the global outlook.
European equities rose and the VIX index (a proxy for global risk aversion) tracked steadily lower. This all served to underpin demand for high yielding currencies like the NZD. In contrast, “safe-haven” currencies like the USD and JPY were shunned, sending NZD/JPY from 63.80 to above 64.60 and NZD/USD to within a whisker of 0.7400.
However, the lofty highs in the NZD didn’t last for long.
Another disappointing read on US consumer confidence 50.4 vs. 51.0 expected) released later in the night eroded investors’ risk appetite and “safe-haven” currencies like the USD staged a comeback. US stock markets went into reverse (the S&P500 is roughly unchanged) and the NZD/USD soon skidded back to the familiar 0.7330 level.
Yesterday we noted NZD/USD’s break through key resistance at 0.7330 could pave the way for further short-term gains. However, the clear rejection of the 0.7400 level overnight means the currency is probably back in consolidation mode for now.
Indeed, according to our short-term valuation model, the NZD/USD is more or less fairly valued at present. The model currently suggests a short-term “fair-value” range of 0.7300-0.7500.
In any case, direction for today will come from a couple of key local events.
June quarter Australian CPI will hold important clues for future RBA action, and hence the AUD.
Our Australian colleagues expect a 0.7%q/q gain in the underlying series.
An outcome of 0.9% or above may well prompt an August RBA rate hike, which would clearly be AUD (and by association NZD) positive. Locally, all eyes will be on this afternoon’s NBNZ confidence survey, where a clear drop in net confidence is expected.
After a fairly choppy night in currency markets, the USD ended the session slightly firmer against most of the major currencies. The first part of the night was all about rising risk appetite. European stocks posted their 5th consecutive daily gain – the Euro Stoxx 50 index rose 0.95% – as bank stocks surged after both UBS and Deutsche Bank reported better-than-forecast Q2 profits.
Yet more encouraging European economic data added to the buoyant mood. Eurozone money supply and German consumer confidence figures both outstripped analyst expectations slightly, while the UK CBI retail sales report jumped to the highest level in three years (33 vs. 3 expected).
Against this backdrop, “safe-haven” currencies like the USD and JPY were again under pressure early in the night, with EUR and GBP leading the gains amongst the major currencies. EUR/USD climbed from sub-1.3000 to a 2-month high of almost 1.3040. However, GBP/USD was the night’s strongest performing currency, closing above 1.5500 for the first time since February.
Nevertheless, the USD managed to bounce back later in the night. Disappointing July US consumer confidence figures (50.4 vs. 51.0 expected) triggered more jitters about the US economic picture, cooling investors’ risk appetite.
Indeed, after a strong start to the night, US equities have dipped back into the red (the S&P500 and Dow Jones indices are both down around 0.1%). EUR/USD slid back below 1.3000, helped by market chatter of Swiss National Bank selling, and AUD, CAD and NZD all eased off their overnight highs.
Late USD gains were most marked against the JPY which, along with some speculative demand for JPY crosses, also suffered from a drop in Japanese bond yields (10-year yields closed at 1.06%, the lowest since 2003). From below 87.00, USD/JPY ended the night closer to 87.80.
Markets are still in a ‘glass half full’ frame of mind at present. Whether or not this continues, and hence whether the rally in ‘risk-sensitive’ assets can be sustained, will depend on the strength of upcoming economic data. This week is fairly light on this front but we’d suggest keeping a close eye on today’s Australian CPI and US durable goods orders data, Thursday’s European economic confidence figures and, most notably, Q2 US GDP on Friday. In the short-term, support on the USD index is eyed towards 81.20, with initial resistance likely to be found on rallies towards 83.20.
* Mike Jones is part of the BNZ research team.