By Mike Jones
Yesterday’s dip in the NZD/USD proved short-lived. A sharp reversal in USD sentiment saw NZD/USD surge just over 1 cent to 0.7550 overnight.
After showing tentative signs of life early in the week, the USD once again hit the skids overnight as prospects for Fed quantitative easing returned to the spotlight. Influential US consultancy Medley said the Federal Reserve will buy US$500b of Treasury bonds over the next six-months.
Appetite for “safe-haven” currencies like the JPY and USD was also knocked by a generalised recovery in risk appetite. Global equity markets resumed their rally after yesterday’s slide, commodity prices jumped around 2.0% (according to the CRB index) and our risk appetite index climbed from 62.6% to 64.9%. Amid market chatter of heavy selling by Asian Sovereign accounts, the USD index eventually reversed all of the previous day’s gains.
As a consequence, the EUR/USD was propelled more than 2 cents higher, AUD/USD jumped from 0.9700 to nearly 0.9900 and NZD/USD was dragged up from 0.7450 to around 0.7550. Earlier in the week, we flagged pull-backs in the NZD/USD would likely be limited to around 0.7450 this week given buoyant risk appetite and solid commercial and real money demand for AUD on NZD on dips. While this expectation remains in tact, today’s wealth of event risk has the potential to cause increased currency volatility.
We expect NZ net immigration to be modestly positive for the month, while this afternoon’s ANZ-RM consumer confidence index could arguably go either way, from its solid 116.4 of September. A slew of Chinese data due at 3pm (NZT) will likely take on added importance given Wednesday night’s surprise Chinese rate hike. Our short-term valuation model suggests a “fair-value” range in NZD/USD of 0.7350-0.7550, suggesting the NZD/USD is not yet overvalued on an immediate basis.
There has been a sharp reversal in market sentiment over the past 24 hours. The USD has reversed nearly all the previous day’s gains as risk appetite recovered and markets’ focus returned to prospects for US monetary easing. Support for the USD began to fade yesterday afternoon following Asian markets’ surprisingly sanguine response to China’s 25bp rate hike. The Shanghai composite index actually ended the day in the black, while other Asian equity indices recorded only modest losses.
This suggested investors regarded the Chinese tightening as more an acknowledgment of strong Chinese growth, than a threat to the soft landing currently expected for the Chinese economy. Overnight, global equity markets bounced back from the previous night’s sharp falls. European stocks rose 0.1-0.5%, while US indices were up a stronger 1.2-1.5%, as the US corporate earnings season continues to impress. Delta Air Lines, US Airways and Wells Fargo all reported better than expected profits, joining the 83% of companies that have beaten earnings expectations in the Q3 earnings season to date.
Firmer equity markets and easing risk aversion (the VIX index fell from 21% to nearly 19.5%) sapped demand for “safe-haven” currencies like the USD and JPY. Sentiment towards the USD was also dealt a blow by a Medley report suggesting the Fed could buy up to US$500b of Treasury bonds over the next six months, as part a second round of quantitative easing (QE).
Against the broadly weaker USD, the EUR led the gains amongst the majors, surging from below 1.3750 to above 1.3950. Not only did the ECB’s Stark reiterate the ECB could raise rates before unwinding its liquidity measures, but German Chancellor Merkel said the German economy could grow by "3% or perhaps even a bit more this year." GBP/USD was briefly knocked back following confirmation from the Bank of England’s October minutes that one MPC member had voted for a £50b extension to the BoE’s asset purchase program.
However, given the backdrop of broad USD weakness, the dip was short-lived and GBP/USD finished the night around 1% stronger at 1.5850. Also supporting GBP sentiment, UK Chancellor Osborne announced £80b worth of spending cuts designed to get the UK’s whopping budget deficit under control. Half a million jobs will be cut, welfare payments slashed and the retirement age will be raised.
* Mike Jones is part of the BNZ research team.