By Mike Jones*
The NZD/USD spent most of last week shuffling sideways in a 0.6960-0.7120 range.
“Growth-sensitive” currencies like the NZD/USD climbed steadily on Friday night.
Not only was Q2 US GDP revised down by less than expected, but soothing words from Fed Chairman Bernanke allayed fears about the US growth outlook.
Bernanke said the Fed stands ready to provide “additional monetary accommodation” should the US outlook deteriorate further. Market sentiment brightened noticeably.
Global equity markets jumped 0.7-1.7% and oil prices surged almost 2.5%.
In currency markets, investors trimmed positions in “safe-haven” currencies like the CHF and JPY in favour of the AUD, NZD and CAD. After starting the night around 0.7030, the NZD/USD finished the week closer to 0.7130. Investors are still trying to decide a) whether or not the US economy is heading for a double-dip recession and b) will the sharp slowing in the US economy result in a deep global slump.
The heightened uncertainty is tending to keep the NZD/USD trading choppily within familiar ranges as appetite for risk ebbs and flows. Our risk appetite index (which has a scale of 0-100%) spent most of last week jumping around either side of the 50% long-run average. All the while, ‘fundamental’ support for the NZD/USD has tended to fade. NZ-US 3-year swap spreads slipped below 290bps last week for the first time since late April. On their own, NZ-US interest rate differentials are consistent with NZD/USD trading closer to 0.7000.
Indeed, our short-term valuation model currently suggests a NZD/USD “fair-value” range of 0.6950-0.7150. Nevertheless, we suspect the fortunes of the NZD/USD rest with USD sentiment this week. While the local data calendar is fairly quiet, US markets are locked and loaded for the heavy-hitting ISM manufacturing and non-farm payrolls releases.
Should this week’s US data calm fears about a US double-dip recession, we’d expect a stronger USD to knock the NZD/USD lower.
The USD was buffeted by offsetting influences on Friday. While a surge in US bond yields provided support, a reduction in “safe-haven” demand limited the topside. The net of these factors saw the USD basically chop sideways. All eyes were on US GDP figures for June and Fed Chairman Bernanke’s address to the annual Jackson Hole central bankers’ summit. Both events provided some welcome cheer for markets. June quarter US GDP was revised down by less than expected (1.6% annualised vs. 1.4% expected), calming fears about the extent to which US activity is slowing.
Meanwhile, Bernanke’s soothing words seemed to hit all the right buttons. While the slowing in US economic momentum was acknowledged, Bernanke also downplayed the chances of the dreaded double-dip recession. What’s more, the door was left open for the Fed to “provide additional monetary accommodation through unconventional measures if it proves necessary.” Bernanke’s pledge to shore up US growth if required saw equity markets post strong gains and bond yields march higher.
The 10-year US Treasury yield ended the night some 17bps higher at 2.65%. As a result, USD/JPY was launched from below 85.00 to nearly 85.40. A step-up in verbal intervention from Japanese authorities also underpinned the USD/JPY on Friday. Prime Minister Kan said “we will take firm measures when needed” to address the strong JPY. Market chatter is currently abuzz with rumours the Bank of Japan may hold an emergency meeting as early as Tuesday to discuss the need for further monetary policy loosening.
The S&P500 posted a 1.65% gain on Friday to end the week down 0.6%. Meanwhile, the VIX index (a proxy for risk aversion) slipped to lows for the week around 24.5%. Against a backdrop of firm equities and rising risk appetite, “safe-haven” currencies like the USD, JPY and CHF generally underperformed on Friday. The week ahead is simply chock-full of event risk. Hot on the heels on Bernanke’s weekend address, an army of Fed speakers will provide more colour on the Fed’s view of the world, as will the August FOMC minutes.
But the two top tier releases on the US data calendar – the ISM manufacturing survey and non-farm payrolls (both for August) – will occupy most of markets’ focus. We suspect further evidence of a rapid slowing in US activity would undermine US bond yields and the USD. We’ll also be keeping an eye on the ECB policy announcement on Thursday and the latest Chinese manufacturing PMI.
* Mike Jones is part of the BNZ research team.