by Mike Jones
A broad strengthening in the USD shaved around ½ cent off the NZD/USD overnight. Still, at around 0.7960, it remains firmly within the bounds of its recent trading range. Absent a big surprise from today’s retail figures, we suspect the 0.7900-0.8060 range will continue to contain the NZD/USD in the short-term.
Speculative buying of USD/CHF and USD/JPY tended to dominate what was otherwise a fairly quiet offshore trading session.
Upbeat US retail figures are being widely touted as the driver of a firming in the USD. However, speculative appetite to jump aboard what looks like a renewed uptrend in USD/JPY looks to be the bigger driver. This has implications for NZD/JPY of course, which rose from 77.60 to around 78.40 overnight.
We anticipate a move towards 80.00 in coming months as Bank of Japan easing expectations begin to ramp up again.
Appetite from leveraged accounts to reduce NZD/AUD long exposure further weighed on the NZD/AUD and NZD/USD overnight. At 0.8745, the NZD/AUD is now almost 2% below its end-July 0.8900 highs.
Further declines are possible as long positions are squared up. But we doubt the losses will extend beyond support around 0.8600. A re-test of the highs looks likely in coming weeks as further evidence of NZ economic outperformance emerges.
Today’s Q2 NZ retail sales figures should paint a picture of an economy on the up. We anticipate a 1.7% quarterly gain in sales volumes. This would lift annual growth to 4.0%. According to Bloomberg, the market anticipates a 1.5% expansion.
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Majors
Asian stocks kick-started the more positive tone yesterday. The Nikkei was the notable outperformer, climbing 2.6% in the wake of reports PM Abe is considering a corporate tax cut to offset the planned sales tax increase.
The better mood continued through the overnight session as encouraging economic data and corporate earnings reports shored up confidence in the global recovery. The German ZEW and Eurozone industrial production underscored the ‘green shots’ emerging in Europe. UK CPI ticked down to 2.8%y/y as expected.
Still, it was US data that seem to capture more of the market’s attention (S&P500 up 0.4%). July retail sales rose a solid if unspectacular 0.5%m/m (ex-auto, 0.4% expected), providing tentative evidence of the Q3 acceleration in US GDP many are looking for.
Despite the small surprise, US bond yields and the USD have soared. 10-year yields jumped almost 10bps to 2.72%, only a smidge below the 2.75% July highs.
Overnight comments from Atlanta Fed President Lockhart effectively endorsing market pricing of a September start to QE tapering no doubt helped the push higher in yields.
Rising US yields have further fuelled the rally in the USD/JPY that began in Asia. From around 97.00 this time yesterday, USD/JPY has climbed to above 98.00, helping drive broader USD gains against the majors. The EUR, CAD, NZD, CHF are all down 0.3-0.8% against the USD. Admittedly, positioning has played a role in the USD’s gains, with speculative accounts being noted as stopping out of short USD/JPY positions.
Looking ahead, tonight’s preliminary Q2 European GDP figures are expected to show the Eurozone finally exiting recession (+0.2%q/q expected). But there will be more attention on UK labour market data now that the BoE has explicitly tied its policy outlook to the UK unemployment rate. The market expects a steady unemployment rate of 7.8%. Anything south of this will steel speculative appetite to sell EUR/GBP, potentially providing the impetus for GBP/USD to have another shot at the 1.5570 highs.
Other news: *Eurozone industrial production rises 0.7%m/m in June, the strongest performance in over two years. *German ZEW shows confidence rising from 10.6 to 18.3 in August (12.0 expected).
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