By Mike Jones*
The NZD has been the world's strongest performing currency over the past 24 hours.
The combination of broad-based USD weakness and renewed appetite for risk propelled NZD/USD to 6-month highs around 0.7350 overnight.
Last night’s mood in financial markets was all about accentuating the positives and downplaying the negatives.
Any lingering concerns about the quality of Friday’s EU bank stress test results were quickly brushed aside, with a surge in US new home sales (23.6%m/m in June vs. 3.3% expected) the main focus for markets. Despite large downward revisions to previous months, the data helped bolster optimism about the global economy, underpinning last night’s gains in equity markets and risk appetite.
US and European equity indices increased 0.5-1.0% and our risk appetite index (which has a scale of 0-100%) climbed to nearly 54%, from closer to 44% at the start of last week.
The generally upbeat mood prompted investors to cut positions in “safe-haven” currencies like the USD and this, combined with a scramble by short-term speculative accounts to cover “short” positions in NZD/USD, eventually propelled the currency above 0.7300.
While we have long been of the view further appreciation in the NZD was to be expected, the speed of the recent climb has been surprising.
Whether or not recent gains can be sustained will depend in part on a couple of this week’s key events.
Wednesday’s Q2 Australian CPI will hold important clues for future RBA action, and hence the AUD.
However, Thursday’s RBNZ OCR decision will hog most of the limelight. We suspect the Bank is unlikely to express any comfort on the NZ inflation outlook, which would probably strengthen demand for the NZD on any dips.
With the NZD/USD having broken through key resistance at 0.7330, we wouldn’t rule out further gains in the short-term.
A daily close above 0.7330 would be consistent with a climb towards the year-to-date high of 0.7440.
Majors
The USD weakened against all of the major currencies overnight as firming risk appetite encouraged investors to trim positions in “safe-haven” assets. Any nagging doubts about the quality of Friday’s EU bank stress test results were quickly forgotten overnight. Rather, the recent string of encouraging global economic data (most notably in the UK and Europe) kept markets in a positive frame of mind, underpinning demand for ‘risky’ assets.
Comments from ECB President Trichet that the stress tests are “certain to restore confidence” certainly helped in this regard.
A surprise 23.6%m/m jump in US new home sales in June (3.3% expected) helped US and European equity markets start the week on the front foot.
This was despite sizeable downward revisions to April and May sales estimates. In addition, US Transportation firm FedEx, regarded as something of an economic bellwether, upgraded its earnings outlook, further supporting US equity market sentiment. The S&P500 is currently up around 1%, with European bourses posting gains of 0.5-1.0%.
The VIX index (a proxy for risk aversion based on the volatility of the S&P500) fell from 24.6% to below 23% – a 2½ month low.
With the equity market rally continuing and appetite for risk returning, the “safe-haven” status of the USD was shunned overnight. Indeed, all the major currencies posted solid gains against the greenback overnight.
Given the apparent comfort offered by Friday’s bank stress test results, the EUR again led the gains among the majors. Strong demand for EUR/JPY and EUR/GBP helped lift EUR/USD to near 2½ month highs around 1.3000 and the GBP/USD was briefly dragged above 1.5500 in the wake of the stronger EUR.
Markets are very much in a ‘glass half full’ frame of mind at present.
Whether or not this continues, and hence whether the rally in ‘risk-sensitive’ assets can be sustained, will depend on the strength of upcoming economic data.
This week is fairly light on this front but we’d suggest keeping a close eye on tonight’s US consumer confidence figures, Wednesday’s Australian CPI and US durable goods orders and, most notably, Friday’s Q2 US GDP data.
In the short-term, support on the USD index is eyed towards 81.20, with initial resistance likely to be found on rallies towards 83.20.
* Mike Jones is part of the BNZ research team. All its research is available here.
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