There has been little activity in the major currencies overnight, with the EUR remaining weak, while the JPY remained resilient and the USD’s strength is broadening somewhat. The big mover overnight was the NZD, which plunged on the RBNZ’s guidance (more below).
The flash July HSBC Manufacturing PMI for China was out stronger than expected, suggesting that the recent Chinese stimulus is taking hold. This had AUD on the bid overnight, though a glance over at iron ore prices, for example, suggests grounds for caution on any durable AUD upside on this data point. AUD is getting overdone, though it won’t likely correct lower until this rabidly risk-on environment experiences headwinds. I would imagine that at some point out in the future, if we see an ugly sell-off in risky assets – besides EUR/EM pairs, EURAUD would be a massive gainer. For now, the market is content to sell the EUR hand over fist, however, and I remain sympathetic to the EURUSD downside view.
The Reserve Bank of New Zealand lifted rates overnight by 25 basis points as expected, bringing the Official Cash Rate to 3.50 percent, but its guidance was very dovish relative to market expectations, as the bank clearly wants to shift to a more neutral stance: “It is prudent that there now be a period of assessment before interest rates adjust further towards a more neutral level.” There was also a very pointed mention of the overvalued NZD: “…the level of the New Zealand dollar is unjustified and unsustainable and there is potential for a significant fall.” Ouch.
NZDUSD
A steep sell-off overnight in NZD is taking NZDUSD to the brink of a entirely breaking the back of the previous rally, as the 61.8 percent Fibonacci retracement at 0.8570 is under threat. Breaking through there could set up a test of the next supports down toward the 200-day moving average near 0.8450 and the previous 0.8400 area lows and usher in a structurally bearish outlook from here.
Looking ahead
Today’s busy European calendar session offers flash European PMI surveys from the major Eurozone economies and the Eurozone itself. Sweden releases its latest employment data after EURSEK teased below the 9.20 support area yesterday – watch for direction on the other side of this release. Later, we have UK June Retail Sales.
USD strength is showing signs of broadening, with GBPUSD and EURUSD under pressure to the downside and USDCAD pulling higher from support yesterday and NZDUSD collapsing overnight. Now we just need AUDUSD to fall apart back below 0.9400 as well and for USDJPY to pull above 102.00 and we can start to call the USD the king of the hill. Perhaps another strong weekly jobless claims number today would do the trick?
Overnight, watch out for Japan’s latest CPI data, though there may be little reaction to this, given the recent Bank of Japan rhetoric that they are expecting lower inflation in the near term due to basing effects. Tomorrow we close the week with the July German IFO survey and UK GDP, two numbers that will sort out whether the incredibly persistent EURGBP downtrend is set to continue or faces consolidation.
Economic Data Highlights
- New Zealand RBNZ hiked the Official Cash Rate 25 bps to 3.50% as expected
- New Zealand Jun. Trade Balance out at +247M vs. +100M expected and vs. +270M in May
- Japan Jun. Adjusted Trade Balance out at -¥822.2B vs. -¥642.9B expected and -¥910.8B in May
- Japan Jul. Preliminary JMMA/Markit Manufacturing PMI out at 50.8 vs. 51.5 in Jun.
- China Jul. Preliminary HSBC Manufacturing PMI out at 52.0 vs. 51.0 expected and vs. 50.7 in Jun.
- Spain Q2 Unemployment Rate (0700)
- France Jul. Markit Preliminary Manufacturing and Services PMI (0700)
- Sweden Jun. Unemployment Rate (0730)
- Germany Jul. Preliminary Markit/BME Manufacturing / Services PMI (0730)
- Sweden Jun. PPI (0730)
- Euro Zone Jul. Preliminary Markit Manufacturing/Services PMI (0800)
- UK Jun. Retail Sales (0830)
- US Weekly Initial Jobless Claims (1230)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US Jun. New Home Sales (1400)
- US Jul. Kansas City Fed Manufacturing Survey (1500)
- Japan Jun. National CPI (2330)
- New Zealand Jul. ANZ Activity Outlook/Business Confidence (0100)