fxmatters

The pivotal events in the next few weeks will be whether further signs emerge of a second half global recovery (albeit probably a weak and choppy recovery). There are some signs amongst leading indicators but confirmation will be sought in the next few weeks before the collective sigh of relief goes out. One key statistic this week with high impact potential is the US ISM Manufacturing survey due Wednesday night. Any hint of a turnaround could reignite the global risk-buying wave that petered out last week.

The most probable scenario is that recovery signs will be patchy and slow to emerge, and hence the USD broad sideways pattern may persist for a few weeks yet (NZD/USD approximately 50-60c).

But the risks have changed. The eventual breakout looks more likely now to be a higher NZD/USD. Three recent changes are noteworthy:

• there has been the strong bounce of equity markets, feeding through in particular as support for the previously weak South Korean won (KRW/USD +14% in 3 weeks), as well as for the NZD.
• there is the interdependent buying of commodities (Oil +15%) and investment flows into commodity-producing countries (as reported by major funds custodian State Street).
• local interest rates are up, especially relative to the US (expected Dec 90-day rates wider by 0.75% in NZ over 3 weeks and by 0.72% in Australia).

In short, there is renewed interest in the NZD and AUD. It may be reignited this week should news emerge of a turnaround in global fortunes. It may emerge next week once the next RBA rate cut is out of the way. Or it may be that we have to wait until later. But a rally is likely in the next few months.

PS. there will be plenty of interest Thursday night but the ECB press conference is likely to be more influential than the G20 leaders’ brief London meeting.