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US Q3 GDP comes in healthier than anticipated; German inflation numbers soft; next leg higher in the USD may come from release of Japanese data

Currencies
US Q3 GDP comes in healthier than anticipated; German inflation numbers soft; next leg higher in the USD may come from release of Japanese data

By Raiko Shareef

NZ Dollar

The NZD has regained its composure over the past 24 hours, with NZD/USD posting a 0.6% gain to 0.7850.

The remarkably soft tone struck in yesterday’s OCR Review should have seen NZD weaker still, but it appears that the market is suffering from fatigue on the USD rally.

Furthermore, the RBNZ’s FX transactions data revealed little to trouble investors, with the Bank following up on August’s $521m selling activity with a much smaller $30m in September.

We suspect that failure of NZD/USD to test the low 0.77 area yesterday at least partly stems from strong support in NZD/AUD around 0.8850. That marks the 2014-low and has been rejected twice already this year. That seems justified, with NZ-AU interest rate and terms of trade differentials holding largely steady. Those two components are key drivers of the cross.

Today, NZ building permits are expected to show a 1.0% m/m, but we doubt that NZD will pay much lasting attention. We mark initial support and resistance at 0.7800 and 0.7900 respectively.
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Majors

Overnight, the USD ran out of puff in its post-FOMC rally. The Bloomberg Dollar Spot Index has added just 0.1% to follow up on yesterday’s 0.6% gain. This is a strange result, especially in the context of data released last night.

The marquee release was the first reading of US Q3 GDP, which printed at +3.5% q/q annualised, much healthier than the +3.0% market median pick. Only 6 analysts out a surveyed 87 predicted an outcome as strong.

Some of the details were slightly softer than expected, with particular attention on the consumption component (+1.8% vs +1.9% exp).  But that is a minor quibble with a broadly encouraging report. Certainly it helps to vindicate the optimism that the FOMC voiced in yesterday’s policy decision.

Across the Atlantic, the preliminary read of German inflation for October was soft. CPI inflation fell by 0.3% m/m (against expectations for a 0.1% fall), keeping the annual inflation rate at a lowly 0.8% y/y, defying analyst picks for an improvement to 0.9%.

The confluence of these factors should have driven the USD higher, but failed to do so. There was a fleeting attempt to do so, but that was swiftly unwound. And taking the path of least resistance, the USD simply drifted lower.

Some might point to better-than-expected German unemployment figures as cause for EUR support. Unemployment fell by 22k against expectations of a 4k rise. But we are sceptical. Really, inflation (or, more accurately, the lack thereof) remains the bogeyman in Europe. That should have driven the price action, not the labour market.

Rather, we think it is more a positioning story. Speculative investors are already aggressively ‘long’ the USD, with positioning nearly at the most stretched levels since 2002, according to CFTC data. Positioning data for EUR tells a similar story. On a technical basis, investors are also eyeing the 1.2600 level in EUR/USD. A close below that at the end of the New York session (10am NZT) would be taken as a bearish signal (and a positive for USD).

A potential catalyst for the next leg higher in the USD may come out of Japan today, where the BoJ is set to release a fresh set of forecasts, including GDP and CPI. It would be wholly unsurprising to see the former downgraded, but the latter will be watched more closely. A downgrade to the inflation outlook might be taken as a signal that the BoJ will step up the pace of its asset purchases.

However, the mood music from Japanese officials, including BoJ Governor Kuroda, in recent months suggests this is unlikely.

More interesting are suggestions that Japan’s massive Government Pension Investment Fund (GPIF) might announce new asset allocations today. Investors have been expecting higher weights to be applied to equities and offshore bonds, which would likely be JPY negative. Japan’s Nikkei newspaper reported that these long-anticipated announcements could come today. JPY was the weakest performing major against the USD overnight, down 0.4% to 109.40.

Elsewhere, markets will be closely watching euro-zone and US inflation outturns, as well as a swathe of other US data.

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