By Mike Jones*
After shuffling sideways for most of the week, the NZD/USD surged on Friday night. Broad-based USD weakness propelled NZD/USD to 10-month highs around 0.7450. The USD suffered last week from the double whammy of rising global risk appetite and tumbling US bond yields on speculation the Fed will restart quantitative easing. On a trade-weighted basis, the USD slumped to an 8-month low, providing a default lift to most of the major currencies.
Against the broadly weaker USD, the EUR/USD soared over 2% to 6-month highs above 1.3750 and the AUD/USD rose to 26-month highs around 0.9740. While the generally uninspiring NZ economic pulse initially limited the NZD/USD’s climb to the 0.7400 region, Friday night’s gains in risk appetite eventually provided the impetus for the NZD/USD to test 10-month highs around 0.7450. A wealth of global manufacturing data released on Friday soothed fears of a double-dip global recession, supporting commodity prices and equity market sentiment. After starting the week around 51%, our risk appetite index finished the week closer to 57.5%.
This week’s commodity price data will provide a useful cross-check on how well ‘fundamental’ support for the NZD/USD is holding up. For today’s ANZ indices on such, we expect the world price index increased as much as 3%, on the back of wool, lamb, aluminium and dairy. For the most recent news on dairy export prices, keep an eye on Fonterra’s latest fortnightly auction on Wednesday. It’s worth noting, NZD/USD is starting to look overstretched on a “fair-value” basis.
Our short-term valuation model currently suggests a NZD/USD “fair-value” range of 0.7200-0.7400. This suggests additional near-term gains in NZD/USD will be harder fought. Nevertheless, with positive momentum and the broadly weaker USD currently underpinning the currency we doubt we’ll see a substantial correction this week. Initial support is eyed on dips towards 0.7320. Resistance will be found towards 0.7520.
Majors
The USD weakened against all of the major currencies on Friday.
Over the week, the USD index fell 1.6% to the lowest level in 8 months. Dovish Fed-speak provided the trigger for Friday’s bout of generalised USD weakness. New York Fed President Dudley said high unemployment and low inflation were "unacceptable” and “further action is likely to be warranted” unless the outlook improves. Chicago Fed President Evans espoused similar sentiments. The Fed’s hint further monetary easing may be in store weighed heavily on the USD, with Asian central banks particularly heavy sellers.
Against the broadly weaker USD, EUR/USD was propelled to fresh 6-month highs above 1.3750 and AUD/USD scaled 26-month highs around 0.9740.
Meanwhile, USD/JPY was knocked back below 83.20, meaning the currency has now reversed nearly all of the post Bank of Japan intervention gains. So it wasn’t surprising to see more jawboning from Japanese officials on Friday.
Japanese PM said “I hope the BOJ will take further necessary steps aimed at overcoming deflation.” On balance, Friday’s US data was actually a touch better than forecast, but this seemed to hold little relevance for the USD.
Personal spending data for August and the University of Michigan consumer confidence survey were not quite as bleak as expected. And, at 54.5 for September, the ISM manufacturing index came in bang in line with expectations. As a result, US equity indices finished the night marginally in the black.
A solid showing from the weekend’s Chinese non-manufacturing PMI (61.7 from 60.1 last month) supports the notion the Chinese economy has avoided a hard landing. As a result, global risk appetite should start the week on the front foot. Appetite for risk and the EUR are also likely to find support from Chinese Premier Wen’s weekend pledge to buy more Greek bonds and double trade with Greece.
The next key resistance level on EUR/USD is February’s 1.3850 high. Looking ahead, central bank meetings will hog much of the limelight this week. While Australian markets are locked and loaded for a 25bps rate hike from the RBA, rumours suggest the BoJ may attempt to ease monetary policy further. Policy meetings from the ECB and the Bank of England promise to be far less exciting.
On hold decisions from both look fait accompli. US data will also remain in the spotlight as markets speculate on the chances of additional Fed easing. Friday’s non-farm payrolls (flat forecast) will be most closely watched in this regard.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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2 Comments
another 25 bpt by the RBA is not a done deal although the friday sell off in the AUD left the RSI refreshed for another rise, I'd wait and see the next numbers before the RBA meeting to have some more clarity.
Now that the inflation numbers have crept up I am waiting for another RBA 25 bpts, they can not afford to have run away inflation at theis point, and I belive that this time zone of the world is in a diferent league... the currency war is hapening but in another planet.
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