By Mike Jones*
All the boxes were ticked for NZD strength overnight.
Fading risk aversion, a broadly weaker USD, a soaring AUD, and a jump in milk prices all combined to propel NZD/USD from sub-0.7000 to almost 0.7120 last night.
Yesterday’s blockbuster Australian GDP figures (1.2%q/q vs. 0.9% expected) set the AUD/USD on a path for glory, and NZD/USD was more than happy to head up in its wake.
However, Australia’s clear contrast to NZ’s recent economic performance (we expect NZ’s GDP expanded a more modest 0.8% in Q2) weighed on the NZD/AUD, and the cross eventually tested 4-month lows below 0.7800.
More generally, global data released over the past 24 hours has mostly come out on the positive side of the ledger, easing fears about slowing global growth and bolstering investors’ risk appetite.
Most notably, the US ISM survey defied expectations for a decline, rising from 55.5 to 56.3 (52.8 expected). Global equity markets recorded gains of 2.3-3.8% and the CRB index (a broad measure of commodity prices) rose 1.6%.Our risk appetite index (which has a scale of 0-100%) recovered from 45.3% to almost 49%. Not surprisingly, the USD suffered against a backdrop of fading risk aversion and firm equity markets.
Against the broadly weaker USD, NZD/USD climbed from 0.7020 to above 0.7100. A stellar result from last night’s Fonterra’s milk price auction added more juice to the NZD rally. Dairy prices jumped 16.9%, on average, more than reversing last month’s 8.3% fall and halting the trend decline in prices seen over the past four months. In our view, this reduces the downside risk on Fonterra’s 2010/11 forecast payout of $6.90-$7.10 per kg/ms.
We said yesterday that, despite fading local fundamentals, the strength of global data would dictate the near-term direction in the NZD. With the NZD/USD now close to the top end of its recent 0.6990-0.7140 range, we’ll have to see more upbeat data to keep risk appetite underpinned and sustain the NZD/USD’s gains.
Despite a jump in US bond yields, the USD weakened sharply against most of the major currencies overnight.
Financial markets heaved a collective sigh of relief as a string of upbeat data reinforced the notion the global economy remains in recovery mode. Investor’s risk appetite was bolstered accordingly. Not only did yesterday’s Chinese PMI suggest Chinese manufacturing activity remains firm (51.7 vs. 51.5), but Q2 GDP figures showed Australia’s economy growing at the fastest pace in three years (1.2%q/q vs. 0.9% expected).
India’s PMI also held up at 57.2 in August, pointing towards still red-hot demand. With the exception of the Chinese market, Asian equity markets revelled in the upbeat sentiment, recording gains of 0.4-2.0%.
Overnight, a stellar reading of the US ISM manufacturing survey ensured the buoyant mood continued. In contrast to expectations for a sizeable fall, the survey increased from 55.5 to 56.3. A slightly softer read on US employment from the ADP survey (-10,000 vs. +15,000 expected) was largely shrugged off.
US equities and bond yields surged in response to signs the US economy is not headed for recession. The S&P500 climbed 2.7% (following gains of 2.7-3.8% across European equity markets) and 10-year US Treasury yields rose from 2.50% to just under 2.60%.
The VIX index (a proxy for risk aversion) skidded from 26.0% to 24.5%. With investors rediscovering their risk appetite, “safe-haven” currencies such as the USD, JPY and CHF were broadly shunned.
Rumoured USD selling by Asian central banks only added to the pressure on the USD. EUR/USD pushed up from 1.2700 to brush against resistance around 1.2850 and GBP/USD jumped around 1 cent to 1.5460.
For GBP/USD, the support from the softer USD more than offset a fairly ordinary looking report on the UK manufacturing sector. The UK PMI slipped from 57.3 to 54.3 (57.0 expected) in August. Looking ahead, whether or not the USD extends its recent decline will depend on the strength of upcoming US data.
Tonight’s July factory orders and pending home sales figures should provide the entrée to Friday’s non-farm payrolls feast.
In contrast, tonight’s ECB policy announcement should contain few surprises for markets. Given the fundamental support from rising US bond yields, we suspect USD support will kick in soon. In the short-term, dips in the USD index should be limited to 81.90, with initial resistance towards the overnight high of 83.20.
* Mike Jones is part of the BNZ research team.