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Market focused on ugly Chinese housing data which sees sell off in AUD and NZD; NZD worst performer by handy margin

Currencies
Market focused on ugly Chinese housing data which sees sell off in AUD and NZD; NZD worst performer by handy margin

by Raiko Shareef

NZ Dollar

The NZD has suffered a series of (well-deserved) setbacks over the past two days. It is down 0.7% against the USD to 0.8710 for the session, the worst performing major currency by a handy margin.

After Wednesday night’s double-whammy of a USD-positive Yellen testimony and another poor dairy auction, the NZD crunched lower again on a soft inflation print.

The resultant paring back of RBNZ rate hike expectations was reflected in the currency market by a quick 40pt drop in NZD/USD. Later in our day, negative headlines around China’s property market inspired further sell-off.

The cumulative impact was enough to decisively break the NZD’s upward momentum of recent weeks, or least put paid to idea of a near-term break of post-float highs.

Our momentum model was forced to abandon its long NZD/USD position, and is now closer to entering a short position (at 0.8662) than re-entering that long (at 0.8836).

There have been meaningful declines on the crosses as well, most in the region of 0.6%. The EUR’s underperformance against the USD meant that NZD/EUR has not moved too far away from 0.65. On the other hand, NZD/AUD fell by a full cent to 0.9300, where we consider it fairly valued. We expect it to oscillate around here for the coming months.

For now, the 0.8700 level has held up fairly well. Brief forays below that have been rejected, likely helped by short-term exporter hedging needs. Below that, we see initial support at 0.8650. Resistance sits around 0.8750.

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Majors

Fewer fireworks for majors overnight, with markets mulling the implications of Fed Chair Yellen’s testimony on Tuesday night. The USD added to gains, with the US Dollar Index edging 0.2% higher to 80.6.

Dr Yellen’s second appearance on Capitol Hill, this time before the House of Representatives, failed to capture the market’s imagination. Comments about “only moderate risk to financial stability” saw some passing interest, but likely more relevant for equities and credit than currencies.

US data overnight were only slightly different than the market had expected (overs and unders), but nothing for investors to get into a tizzy over. Industrial production and capacity utilisation were marginally disappointing, while producer prices and the NAHB housing market index were better than expected.

Much of the action overnight was confined to the equity space, where generally positive earnings results and proposed M&A activity helped to buoy indices. In Europe in particular, Portugal’s central bank made supportive comments about troubled lender Banco Espirito Santo helped the Euro Stoxx 60 lift by 1.6%. The S&P 500 rose by a more measured 0.4%.

In the UK, the unemployment rate dropped a point to 6.5%, as expected, as jobless claims dropped by faster than expected. However, wage growth grew at a below-consensus +0.3%, meaning that GBP walked away slightly worse off.

Yesterday, China’s data dump saw the headline indicators come broadly in line with expectations. In fact, GDP growth in Q2 hit 7.5% y/y, against 7.4% expected.

For some reason or the other, the market decided to focus on housing related data, which made for ugly reading. Home sales value fell by 9.2% y/y, while new property construction dropped 16.4% y/y. As a result, AUD and NZD were sold off. The AUD/USD has largely recovered those losses, sitting effectively unchanged at the moment at 0.9370.

Today, US housing data and the Philly Fed Index will be the highlights, but markets are likely to be shifting into a lower gear for the remainder of the week.

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Source: CoinDesk

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