By Mike Jones*
After scaling 10-month highs of nearly 0.7450 on Friday, the NZD/USD has spent the past 24 hours drifting lower.
Overnight, upbeat US data offered some respite to the beleaguered USD. August pending home sales jumped to 4-month highs which, combined with renewed concern about the European sovereign debt situation, prompted investors to trim short positions in the USD.
Most of the major currencies drifted lower as a result, led by a near one cent drop in the EUR/USD.
Still, the NZD held up better than most. Indeed, the NZD/USD merely dribbled off to around 0.7400, from closer to 0.7440 at the start of the night.
Helping to bolster NZD sentiment, the ANZ commodity price index yesterday revealed a further 2.9% gain in world prices for NZ’s export commodities.
This puts world prices back to within 1% of their all-time high, achieved in May.
In addition, NZ Finance Minister English hit the wires this morning saying “we don’t see much likelihood” of a weakening in the NZD.
Today’s QSBO will be important for gauging the NZ recovery’s fortitude (due at 10:00am). Last week’s NBNZ business survey offered hope that the business sector is battling on, in spite of a number of obvious headwinds.
However, for currency watchers, the RBA’s policy meeting this afternoon (4:30pm NZT) will probably be of more interest. Market pricing is consistent with a roughly 70% chance of a 25bps rate hike, so some volatility in AUD/USD (and NZD/USD) can be expected whatever the decision.
It’s worth noting, NZD/USD is starting to look overstretched on a “fair-value” basis.
For the first time since November last year, the NZD/USD is above the “fair-value” range implied by our short-term valuation model (of 0.7200-0.7400). However, with positive momentum and the weak USD underpinning the NZD/USD we doubt we’ll see a substantial correction this week. Initial support is eyed on dips towards 0.7320. Stiff resistance will be found towards the November 2009 high of 0.7520.
Majors
The USD bounced off 8-month lows overnight, as profit taking set in after September’s near 6% slide in the USD index. As a result, most of the major currencies eased off their highs. Leading the charge lower was the EUR, which was knocked by renewed concerns about the plight of debt-stricken peripheral Eurozone economies.
Not only did the Irish central bank cut its 2010 GDP forecast from 0.8%y/y to 0.2%, but the draft Greek budget forecast the economy to contract a further 2.6% in 2011, after a 4% slump this year. The Eurostoxx 50 slipped 1.2% and EUR/USD skidded from 1.3800 to below 1.3700.
Along with the weaker EUR/USD, some encouraging US economic data also offered some respite for the USD. US pending home sales rose 4.3%m/m to a 4-month high in August (2.5% expected), more than offsetting slightly weaker-than-expected August factory orders figures (-0.5%m/m vs. -0.4% expected).
Still, the modest rally in the USD was not accompanied by higher US bond yields.
In fact, the 2-year Treasury yield dipped 2bps to a fresh all time low of 0.4%. This suggests position squaring was the bigger driver of last night’s currency movements.
Indeed, CFTC data shows net short positions in the USD amongst the speculative community are around the highest since December 2009.
And market chatter suggests investors are wary of being overly short the USD going into Friday’s non-farm payrolls event risk.
GBP/USD was one of the few currencies to buck the stronger USD trend overnight, rising from around 1.5760 to almost 1.5860.
Contributing to the GBP’s gains, September PMI construction figures were not quite as weak as expected (53.8 vs. 51.4 expected) prompting investors to trim long EUR/GBP positions. Looking ahead, central bank meetings look set to occupy much of the limelight this week.
The RBA meets today with most market participants and economists expecting a 25bps rate hike.
In contrast, the Bank of Japan concludes its two day policy meeting today and rumours suggest it may attempt to ease monetary policy further.
Policy meetings from the ECB and the Bank of England on Thursday promise to be far less exciting.
Overall, we expect US data will remain in the spotlight as markets continue to weigh up the chances of additional Fed easing. Friday’s non-farm payrolls (flat forecast) will be most closely watched in this regard.
Near-term support on the USD index is eyed on dips towards 78.00, with initial resistance around 78.80.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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