Kiwi Upwards

The NZD/USD continued on its upward trajectory overnight, drifting up from 0.7120 to an overnight high of nearly 0.7180, says Mike Jones, strategist markets BNZ.

The afterglow of yesterday’s stellar Fonterra milk price auction (prices jumped 16.9%y/y) proved a boon for NZD/AUD over the past 24 hours. Yesterday’s fairly lacklustre Australian trade balance data (A$1.8b vs. $3.1b expected) provided additional support. A squaring of NZD/AUD short positions by momentum and leveraged accounts squeezed the currency from 0.7820 to almost 0.7900 overnight, underpinning the gains in NZD/USD.

Its worth noting, NZD/AUD has been inching closer to “fair-value” over the past few weeks. Our short-term NZD/AUD valuation model (which is based on NZ-AU 3-year swap spreads, NZ-AU commodity price differentials and relative business confidence) suggests a “fair-value” range of 0.7650-0.7850 in NZD/AUD. This suggest that, while further downside remains in the offing, a sustained break below 0.7700 is unlikely in the absence of further slippage in NZ-AU interest rate differentials.

Overnight, currency markets lacked direction somewhat. Investors were mostly content to sit on the sidelines ahead of tonight’s US non-farm payrolls main event. Still, more snippets of encouraging economic data kept risk appetite on the front foot. US jobless claims stabilised, US pending home sales bounced 5.2% and the ECB revised up its growth forecasts for 2010 and 2011. Our risk appetite index (which has a scale of 0-100%) climbed to a high for the week of 53%. As a result, the NZD/USD consolidated its gains, eventually testing resistance around 0.7150.

Looking ahead, the NZD/USD is threatening to break out of the top end of its recent 0.6990-0.7160 range. A convincing break would bring 0.7350 into view as the next key resistance level. With the local data calendar empty, offshore developments, in particular tonight’s US non-farm payrolls survey, will dictate near-term direction.

Majors

Currency markets took a breather overnight. Most of the majors tracked narrow ranges as traders positioned themselves for tonight’s US non-farm payrolls data. The USD index shuffled sideways in a tight 82.30-82.60 range.

Overall, risk appetite remained robust. For the most part, stock markets managed to build on Wednesday night’s strong gains and the VIX index (a proxy for global risk aversion) continued to drift lower. The CAC rose 0.2%, the FTSE edged up 0.1% and US stock indices are currently up a slightly firmer 0.2-0.7%.

Contributing to the more optimistic mood, last night’s limited US data offering tended to support the notion investors’ concerns about a double-dip US recession are over blown. Jobless claims were broadly stable and July pending home sales recorded a surprise increase (5.2%m/m vs. -1.0% expected). As a result, US bond yields continued to press higher. Yields on 10-year US Treasuries leapt 6bps to 2.63% but, notably, remain a whopping 30bps below levels prevailing at the start of August.

The ECB’s policy announcement and accompanying press conference contained few surprises. The ECB’s policy rate was left on hold at 1% and the wind-back of the bank’s short-term lending/liquidity programmes was pushed back until 2011, both as expected.

A lift in the staff growth forecasts provided some fleeting cheer. The ECB now expects the Eurozone economies to expand 1.6% in 2010, from 1.0% previously. This, combined with last night’s successful Spanish and French debt auctions (a total of €12.2b was auctioned) kept the EUR/USD underpinned in a broad 1.2780-1.2840 range. A bout of EUR/GBP buying following the softer-than-expected UK PMI construction survey (52.1 vs. 53.2 expected) also served to prop up the EUR/USD.

The Swedish krona was one of the night’s strongest performing currencies after the Riksbank unexpectedly lifted its policy rate 25bps to 0.75%, accompanied by a fairly hawkish statement.

Looking ahead, attention now shifts towards tonight’s US non-farm payrolls report for August. Analysts expect 103,000 jobs were cut over the month, which would mark the third straight monthly fall. With investors still on edge about the chances of a double dip US recession, we suspect any disappointment would scupper the recent bond market sell-off, providing headwinds for the USD. Initial support on the USD index is still seen towards 81.90, with topside pressure towards 83

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