By Mike Jones*
Markets’ relatively buoyant risk appetite underpinned further gains in the NZD overnight.
NZD/USD climbed nearly 1% to a one-month high above 0.7280.
However, it was the AUD that blazed the way higher for “growth-sensitive” currencies overnight, following yesterday’s epic Australian jobs report.
Employment grew by a robust 31,000 (53,000 full-time) in August, but it was the fall in the unemployment rate, to 5.1% from 5.3%, which really caught markets’ eye. In the wake of the data, Australian markets moved to price a roughly one in four chance the RBA raises rates at its next (October) meeting, propelling the AUD/USD to 4-month highs above 0.9250.
Other commodity-linked currencies like the CAD and NZD were dragged up in the AUD’s wake. In contrast, NZD/AUD headed south with local markets still convinced the RBNZ won’t raise the OCR until early next year. With NZ-AU 3-year swap spreads approaching 15-year lows around -95bps, we wouldn’t be surprised to see NZD/AUD continue to fall in the near-term. A test of 0.7800 is looking increasingly likely.
Overnight, US data continued its recent improving tone, keeping markets’ relatively buoyant risk appetite intact. The rally in equity markets continued and our risk appetite index (which has a scale of 0-100% and a long-run average of 50%) climbed to 54%. The more upbeat backdrop further encouraged NZD demand, and NZD/USD broke above 0.7260 for the first time since early August. Looking ahead, there is plenty of event risk to keep markets occupied over the next 24 hours.
We’re looking for a 2.2% gain in NZ’s terms of trade from today’s OTI data. Chinese trade figures also look set to be released at some stage today, while Chinese authorities have brought forward Monday’s bucket load of August data to Saturday.
Resistance in NZD/USD will be found towards the July/August highs of 0.7360, with support around 0.7150.
Last night’s movements in currencies were a bit of a mixed bag. A second straight day of gains in equity markets bolstered “growth sensitive” currencies like AUD and CAD, while EUR and GBP were weighed down by ongoing growth worries.
Reflecting these mixed fortunes, the USD index shuffled sideways in a 82.30-82.80 range. US data continued its recent improving tone. US weekly jobless claims fell to 451,000, the lowest in two months (470,000 expected) and the July trade balance narrowed by slightly more than expected (-US$42.8b vs. -US$47.0b expected). The encouraging data helped calm fears of a sharp slowdown in the US economy, underpinning a 0.5% rise in the S&P500.
Across the Atlantic, European equities were bolstered by rumours Basel III capital requirements (to be released on Sunday) will not be as onerous on banks as earlier feared (ECB Board member Stark earlier said banks may be undercapitalised).
The FTSE increased 1.2%, the DAX rose 0.9% and the CAC 40 jumped 1.2%. Gains in global equity markets, combined with yesterday’s blockbuster Australian employment figures, saw “growth-sensitive” currencies outperform overnight. Indeed, AUD/USD hit a 4-month high above 0.9250.
A slide in some industrial metals prices prevented further gains though, amid reports China was carrying out a probe into hedge fund positioning in some commodity markets. In contrast, GBP and EUR spent the night dribbling lower. There were no surprises from the Bank of England’s policy meeting.
The MPC kept the BoE’s policy rate unchanged at 0.5% and voted for no change to its asset purchase programme.
However, July UK trade figures were fairly uninspiring (-£4916m vs. -£3300m expected) and the NIESR (a UK think tank) said the BoE is unlikely to raise interest rates until mid-2011 (we agree). GBP/USD slipped from 1.5470 to below 1.5440 accordingly.
USD/JPY hovered around 15-year lows amid more ineffectual jawboning attempts from Japanese policy makers.
Finance minister Noda said FX intervention simulations were being conducted, but these comments were somewhat undermined by reports the BoJ Governor refused to discuss currencies at a government meeting. Looking ahead, the relative strength of a slew of Chinese data due out over the next two days will help determine whether or not markets’ relatively buoyant risk appetite is maintained, and hence whether “growth-sensitive” currencies can continue to outperform.
Support on the USD index is eyed towards 82.10, with initial resistance at 83.15.
* Mike Jones is part of the BNZ research team.