By Mike Jones*
Yesterday’s September quarter QSBO was certainly disappointing.
We had our fingers crossed that, like last week’s NBNZ survey, it would show resilience in moving sideways. Instead it took a definite leg lower and slower. However, further evidence of a fizzling domestic recovery has had little impact on the NZD over the past 24 hours.
Indeed, after a brief splutter in the wake of the QSBO, the NZD/USD subsequently rocketed to 10-month highs within a whisker of 0.7500 overnight. Yesterday’s RBA policy announcement probably helped.
The RBA’s decision to keep its policy rate unchanged at 4.5% (against widespread expectations of a 25bps rate hike) blindsided a market that had been heavily long AUD.
As speculative players were forced to unwind short NZD/AUD positions, the cross was propelled from below 0.7650 to almost 0.7750, helping underpin the NZD/USD. Overnight, the NZD/USD continued to climb, driven by another bout of generalised USD weakness.
In addition to the headwinds from sliding US bond yields, rising risk appetite further weighed on the USD overnight. The Bank of Japan’s surprise announcement to cut its policy rate and expand its asset buying programme buoyed hopes central banks would ride to the rescue of the global economic recovery.
And, along with generally upbeat global service sector data, this spurred strong gains in equities and commodity prices. The S&P500 jumped around 2% to 4-month highs and the CRB commodity price index rose 1.6%. Our risk appetite index (which has a scale of 0-100%) increased from 54% to above 58%.
The generally upbeat risk sentiment saw investors shun “safe-haven” currencies like the USD and JPY in favour of “growth-sensitive” currencies like the NZD and AUD. Looking ahead, near-term resistance in NZD/USD will be found towards November’s 0.7520 high.
A daily close above this level would pave the way for a test of 0.7630.
The USD was slammed overnight. But rather than fears about Fed quantitative easing and sliding US bond yields, last night’s USD weakness was more about rising risk appetite sapping demand for “safe-haven” currencies like the USD and the JPY. The Bank of Japan surprised markets yesterday by cutting its target policy rate to 0-0.1% (from 0.1%) and pledging to buy ¥5 trillion worth of assets in an attempt to revive the flagging Japanese economy and stem recent JPY strength.
Alongside the Fed’s apparent promise to restart quantitative easing, the BoJ’s move buoyed hopes central banks would ride to the rescue of the global economic recovery, cheering market sentiment. After a strong lead from Asian stocks, European equities surged 1.3-2.6% overnight with Wall St stocks up 1.7-2.0%. The VIX index (a proxy measure for global risk aversion) fell from above 23.5% to around 21.8%. Upbeat global services data reinforced investors’ more optimistic mood.
European and UK services PMIs outstripped markets’ already robust expectations and the US ISM non-manufacturing index jumped to 53.2 in September, from 51.5 (52.0 expected).
Against a backdrop of easing risk aversion and surging global equities, investors’ ditched “safe-haven” currencies like the USD and JPY in favour of EUR, GBP, CAD and NZD.
Sentiment towards the USD wasn’t helped by ongoing market chatter of Asian central banks diversifying reserves out of USD. EUR/USD leapt nearly 2 cents to 8-month highs around 1.3850, shrugging off weak Eurozone retail sales (-0.4%m/m vs. 0.2% expected) and ratings agency Moody’s putting Ireland’s sovereign rating on negative watch.
GBP, CHF, and CAD also posted gains of 0.4-0.6% against the broadly softer USD. After a brief spurt from 83.50 to nearly 84.00 in the wake of the BoJ’s policy easing, the USD/JPY spent the rest of the night reversing these gains, finishing up closer to 83.00. Despite the BoJ’s best attempts to stem JPY strength, falling US-JP bond spreads remain an obvious weight on USD/JPY.
Sliding US bond yields mean two year US-JP bond spreads are flirting with 21-month lows around 27bps.
For today, we suspect the current backdrop of buoyant risk appetite and expectations of addition Fed easing will keep the USD heavy. Resistance on the USD index will be found on rallies towards 78.50, with initial support at 76.80.
* Mike Jones is part of the BNZ research team.