By Mike Jones, Currency Strategist, Markets, BNZ
In another fairly volatile night of trading the NZD/USD has once again come up against resistance at 0.8000, where it currently trades.
In the absence of NZ data developments yesterday, the NZD was at the whim of the ups and downs in global sentiment overnight.
The currency found support overnight at 0.7930, but has failed to break above the well-visited 0.8000 level. For now, we'd expect this familiar range to contain the currency, with stiffer resistance eyed at 0.8080.
The next 24-hours will likely once again to be all about global sentiment, with key event risks tonight being European bond auctions and US data (see Majors).
In the backdrop of a slightly weaker EUR overnight, the NZD/EUR pushed back up to its highs, capped by previous resistance levels around 0.6530. This cross now trades at 0.6510.
The NZD/AUD was less well supported given a fairly solid AUD overnight (see Majors). The cross has drifted off from above 0.7740 yesterday afternoon to trade at 0.7720 currently. The NAB quarterly business survey will give an updated on the state of health in the Australian business sector today (13.30 NZT). This provides the main event for the cross today in the absence of key NZ data releases.
Once again it was a bit of a roller-coaster for currencies overnight, but most have returned to trade at fairly similar levels.
Bernanke's comments continued, this time to the US House. He reiterated caution on the economic outlook whilst not seeing a double dip recession. The two key dangers ahead he believed were the US fiscal 'cliff' and European instability. He does not believe Europe is close to a long-term solution, and therefore periods of ongoing financial instability are inevitable.
The USD and EUR were jostled around. The USD ultimately won the day as the EUR/USD has slipped to 1.2260. However, the EUR has managed a small rebound from overnight support at 1.2220. Near-term, we expect the 1.2160-1.2400 range should continue to contain the EUR/USD.
Offsetting the generally gloomy tone from the Fed and headlines from Europe in the past couple of days has been some better news on the US earnings front. However, with 63/500 US S&P500 companies having now reported Q2 earnings growth still sits at -4.6%. But this does represent a 7% positive surprise relative to expectation. This likely helped to underpin a positive return from equities overnight despite a generally lacklustre tone elsewhere. Euro Stoxx 50 closed up 1.50% and the S&P500 is up 0.50%.
Overnight, the Bank of England minutes provided some surprise in that the vote for the extension of QE at the last meeting was not unanimous. Two of the nine members dissented. Still the minutes made fairly dovish reading with a further rate cut also up for discussion. The GBP/USD traded down to almost 1.5580 after the minutes before returning to trade at 1.5650 currently.
The AUD/USD was the strongest performer over the past 24-hours. The resurgence in the AUD since the beginning of June has coincided with a 12% rise in the global CRB commodity price index. This index had another strong run overnight. Some easing of China hard-landing fears has no doubt also contributed. There were various Chinese headlines to note overnight. There was some suggestion China could shift monetary policy from "prudent" to "moderately loose". The AUD/USD is now trading just above 1.0360, having rushed though stops at 1.0330.
Today, the key local release for the AUD will be the AU NAB quarterly business survey. Tonight, look out for Spanish and French bonds auctions, UK retail sales and the US Philadelphia Fed business survey.
It was a very quiet day in NZ markets. Yields closed virtually unchanged. The market continues to price 17bps of RBNZ rate cuts by 12 months time. By contrast, we expect the RBNZ to begin its gradual rate hiking process in H1 next year. Still, no near-term catalyst is yet in sight to change market views. We suspect next week's RBNZ meeting will deliver a fairly neutral statement, that will do little to shift market pricing.
Overnight, in an auction of 2-year German notes the average yield fell into negative territory for the first time, as demand for 'safe' investments continues. US and 10-year yields drifted back toward their lows, now at 1.47% and 1.20% respectively.
Demand for US Treasuries remained solid as Bernanke made his second day of testimony to the House. He appeared to place more emphasis on the negatives of the economy and that the US fiscal situation was "unsustainable".
Overnight, a report showed Spanish bank bad loans climbed in June to an 18-year high. Spanish-German 10-year bonds yields spreads widened by 17bps, taking them to new highs at 576bps.
With the current focus on Spain, tonight's Spanish bond auction will be a critical event to watch. The US Philadelphia Fed survey of business conditions will also be important in influencing market sentiment. Given the overnight moves expect NZ yields to open under downward pressure today. We will also have the weekly DMO bond tender this afternoon. $100m of NZGB19s and $150m of NZGB23s are on offer.
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