Stevens' talk ineffective, Portugal risk pullback, markets await a big load of key US data

by Raiko Shareef

NZ Dollar

The NZD edged lower on Friday, dipping 0.1% against the USD to 0.8810.

NZD/USD had another peek above 0.8830, but that proved short-lived.

The AUD’s temporary dive, inspired by RBA Governor Stevens’ interview, dragged the NZD/USD as low as 0.8800 before bouncing back.

In the absence of any obvious positive triggers, NZD is torn between a technically appealing test of the post-float high, and nervousness about a possible sell-off inspired by equity markets.

For the week ahead, then, US corporate earnings could be as important for the NZD as incoming macroeconomic data.

On the latter, there are only two significant local releases on the cards, both on Wednesday. First up, Fonterra’s fortnightly dairy auction might finally show some stability. That said, the falls to date already put substantial pressure on the 2014/15 payout forecast. Later in the morning, we expect Q2 CPI inflation to rise to 1.8% y/y, from 1.5%, supporting the RBNZ’s firm resolve to normalise monetary policy.

Today, we see resistance at 0.8840, with initial support at 0.8780, ahead of 0.8700.

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Majors

Major currencies were very little changed against the USD for Friday’s session. The big dollar managed to eke out a small gain, with the US Dollar Index up 0.1% to 80.2. The CAD was the biggest mover, weakening on soft employment figures.

Thursday night’s focus on struggling Portuguese lender Bank Espirito Santos failed to gain momentum. Equity markets ended the day higher, with the S&P 500 and the Euro Stoxx 50 both up 0.2%. Still, we expect investors will remain cautious as the US corporate earnings season picks up steam.

In currencies, the only movement of note was in CAD, which slumped after employment fell by 9.4k against +20k expected and the unemployment rate rose to 7.1% from 7.0% and 7.0% expected. The part time/full time split was +33.5/-43.0k but this didn't spare CAD the rod with USD/CAD +0.78% to 1.0734. In the wake of last month’s jump in CPI inflation readings, this coming week’s post-Bank of Canada meeting commentary will be interesting. We suspect it will still err on the dovish side.

The AUD lost a bit of upward momentum in the session, on an exhaustive interview with RBA Governor Stevens, carried in the Weekend Australian. We don’t think it added much to what Stevens covered in his speech in Hobart earlier in the month, but AUD/USD shed about 30pts in short order. This was gradually recovered, with the AUD/USD closing virtually unchanged at 0.9390.

From the US, we had more contrasting comments on the economy and Fed policy from three Fed officials on Friday, Philadelphia Fed President Charles Plosser (hawk), Chicago Fed President Charles Evans (dove) and Atlanta Fed President Dennis Lockhart (dove).  Likely to get more attention this morning is a WSJ article from Fed-whisperer Hilsenrath, which noted the increasing debate between regional Fed presidents about whether to pull rate hikes forward. We note that the article fails to cover the Washington-based Board of Governors, who outnumber voting regional Presidents 7-to-5.

In truth, the market is unlikely to read too much into the words of any Fed speaker other than FOMC Chair Yellen. With that in mind, investors will be most interested in Fed Chair Yellen’s comments on Capitol Hill, in her semi-annual testimony to lawmakers. We would be pleasantly surprised if she acknowledged the recent strength of inflation and employment indicators, but we’re not holding our breath, and suspect she will stick to recent script. A swathe of important US data due this week, including retail sales, industrial production, and housing starts, might then prove to be more informative.

Elsewhere, China is due to publish Q2 GDP, as well as June month retail sales, industrial production, and fixed asset investment (all set for release on Wednesday). China’s GDP growth is expected to remain steady at a year-to growth of 7.4%, stability helped by recent selective policy stimulus to consolidate the economy’s progress. 

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