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BNZ Daily FX Wrap & Strategy

Contributor:
Fuseworks Media
Fuseworks Media
BNZ Daily FX Wrap & Strategy

NZD

The NZD has started the week on the front foot, shrugging off some of last week's woes.

Overnight, sentiment towards 'growth-sensitive' currencies like the NZD recovered. Global manufacturing data provided a clear reminder that the outlook for the global economy in 2010 is a lot better than 2009. Eurozone manufacturing output reached a two-year high in January (the manufacturing PMI index rose to 52.4 from 52.0) and the US ISM manufacturing survey also exceeded expectations (58.4 vs. 55.5 expected). Not only were investors a little more optimistic on global growth prospects, but fears over Greece's fiscal woes subsided somewhat. A top European official said Greece's plans to slash its budget deficit were "ambitious but achievable."

The more upbeat backdrop saw global equity markets recover some of their recent losses and commodity prices post modest gains. European equity indices rose 0.8-1.2% and the S&P500 is currently up around 1.1%. Our index of risk appetite rose from 48% to 52%. Recovering risk appetite and modest gains in equity markets saw some of the recent 'flight to quality' flows into the USD reverse. Against the broadly softer USD, the NZD/USD rose from around 0.7000 to nearly 0.7080.

Compared to its peers, the NZD has held up relatively well through the gyrations in risk appetite over the past 24 hours. Solid NZD demand was noted yesterday from a mix of onshore and Asian accounts. In addition, yesterday's ANZ commodity price index showed NZ's commodity prices continue to head higher. While global prices ticked up a miniscule 0.4% in January, prices are now 43% above their February 2009 trough. Keep an eye out for the results of tonight's Fonterra online dairy price auction for further clues on the outlook for commodity prices.

Today's Q4 Labour Cost Indexes and Quarterly employment Survey (released at 10:45am) should confirm weaker wage growth continues to dribble through. The private-sector LCI is expected to increase 0.4% in the quarter (in line with market expectations).

But the main focus for the market will be the RBA's interest rate decision at 4:30pm (NZT). With Australian markets roughly 60% priced for another 25bps hike, we're likely to see a reaction in the currency whatever the decision. Our Australian colleagues are expecting a 25bps hike. If this pans out, expect some limited support for the NZD and the NZD/AUD to head back towards 0.7900.

Majors

The USD shuffled lower against most of the major currencies overnight, for the first time in just over a week.

The weaker GBP was the main feature of the first part of the night. The January UK PMI manufacturing report was a little stronger-than-expected (56.7 vs. 53.9 expected), but this was offset somewhat by the weaker December mortgage approvals numbers (59,000 vs. 61,800 expected). Election concerns also weighed, with two UK political polls over the weekend suggesting a general election would result in a hung parliament. GBP/USD slid from above 1.5960 to 1.5860, ensuring most currencies started the night of the back foot.

However, later in the night fresh evidence the global economy is on a recovery path, combined with easing tensions over the Greek fiscal crisis, buoyed investors risk appetite and reduced demand for the USD.

Against expectations for a flat result, the European manufacturing PMI managed to eke out a small gain in January (rising to 52.4, from 52.0). In a similar vein, the US ISM manufacturing survey continued the stellar run of recent US data, rising to 58.4 (vs. 55.5 expected). EU Monetary Affairs Commissioner Almunia said Greece's fiscal cutback plans were "ambitious but achievable." In contrast, investors shrugged off US President Obama's latest budget deficit projections. The September 2011 deficit is now expected to reach a post-WWII high of US$1.56 trillion (10.6% of GDP).

Renewed optimism about the global recovery and easing risk aversion saw equities markets and commodity prices post solid gains. The S&P500 is currently up around 1.1%, while the CRB index (a broad measure of global commodity prices) is up 0.7%. As a result, investors pared back 'safe-haven' positions in the USD and JPY, and 'growth-sensitive' currencies recovered. EUR/USD edged off 6-month lows around 1.3850 to a smidge above 1.3900, while USD/JPY surged from 90.20 to nearly 90.90. A rumoured option barrier around 1.3850 may limit EUR/USD losses to this region in the near-term.

Looking ahead, we suspect the precondition for a sustained recovery in risk appetite and 'growth-sensitive' currencies will be a stabilisation in the debt crisis in Greece (and to a lesser extent Spain and Portugal). In the absence of such, we're likely to see further modest gains in the USD this week. On this front, the European Commission is due to release its recommendations for Greece on Wednesday. There is also a string of event risk to watch out for this week, which may serve to remind investors the global outlook for 2010 is not that bad. For today, the RBA cash rate decision and US pending home sales will likely occupy most of the markets attention.

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