By Mike Jones*
The NZD has drifted lower over the past 24 hours. After starting the week around the 0.7150 mark, the NZD/USD slipped below 0.7100 in relatively lacklustre trade overnight (UK markets were closed for a holiday).
Yesterday afternoon’s NBNZ business survey affirmed the NZ recovery is slowing, but not stalling. Its range of indicators seemed to us to convey a business sector that has finally resigned itself to the prospect of a moderate and mixed recovery. This, by and large, simply remains our core view.
Nevertheless, headline business confidence did slip to the lowest level in a year (+25.7 from +32.4 in July). And we suspect headlines to this effect tempered some of the recent NZD enthusiasm amongst speculative and momentum players yesterday afternoon.
Overnight, a surging JPY dominated proceedings in currency markets. Yesterday’s Bank of Japan ‘emergency’ policy meeting was something of a damp squib. Any hopes aggressive measures would be introduced to counter deflation pressures and the rampant JPY were quickly dashed. Investors responded by adding to already sizeable JPY long positions.
NZD/JPY dived from above 61.00 to around 60.00, and NZD/USD was dragged from above 0.7100 to almost 0.7080 in its wake. We suspect the fortunes of the NZD/USD rest with USD sentiment this week.
While the local data calendar offers up mostly second tier data, offshore markets are bracing for a slew of heavy-hitting data, including the US ISM manufacturing and non-farm payrolls releases. Should this week’s US data run counter to market fears of a double-dip recession, we’d expect a stronger USD to knock the NZD/USD lower.
For today, there are bits and pieces of local data to watch out for, including July NZ building permits (at 10:45am) and Australian retail sales (1:30pm). Initial support on NZD/USD is eyed towards 0.7000, with sellers expected to emerge on any bounces towards 0.7140.
The JPY was the strongest performing currency amongst the majors overnight. The other “safe-haven” currencies (such as the USD and CHF) weren’t far behind. As widely anticipated, the Bank of Japan yesterday took further steps to loosen monetary policy in an attempt to ward off both deflation pressures and a stronger JPY.
At an ‘emergency’ meeting, the BoJ expanded its fixed-rate liquidity scheme from ¥20t to ¥30t and added a six-month funding operation. However, the lack of more aggressive measures left markets under whelmed. An earlier 3.2% advance in the Nikkei was pared to 1.8% and 10-year Japanese bond yields dipped 7bps to 1.03%.
In response, investors simply topped up on their already sizeable JPY long positions. USD/JPY tumbled from 85.80 to almost 84.60 and EUR/JPY dived around 2% to below 107.50.
Further JPY gains appear likely in the short-term as markets continue to test the resolve of the BoJ. “Safe-haven” currencies like the JPY, CHF and USD were also underpinned by a mild paring in investors’ risk appetite. Indeed, the afterglow from Fed Chairman Bernanke’s soothing remarks on Friday appeared to wear off as markets braced for more sombre economic news over the week ahead. European stocks edged 0.5-0.7% lower (UK markets were closed for a holiday), and the Dow Jones and S&P500 are both down around 0.8%. The VIX index (a proxy for global risk aversion) rose from below 24.5% to almost 26.5%. USD/CHF slipped from 1.030 to below 1.0250 and GBP/USD,
EUR/USD and AUD/USD all recorded modest declines of 0.4-0.8%. The steady slide in the EUR/USD (from 1.2760 to below 1.2670) came despite some marginally better than expected Eurozone economic confidence data. Last night’s US data were relatively close to expectations and hence had little market impact. Personal spending registered a 0.4%m/m increase for July (0.3% expected) and the core PCE deflator (the Fed’s preferred inflation gauge) ticked up 0.1%, as expected.
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 (Wednesday) and non-farm payrolls (Friday)– will occupy most of markets’ focus. Any 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’s policy announcement on Thursday and the latest Chinese manufacturing PMI, due Wednesday.
* Mike Jones is part of the BNZ research team.