Currency markets focused on the recession in Japan, and the ECB's signal that buying sovereign bonds is now a real option

By Kymberly Martin

NZ Dollar

The NZD/USD sits slightly higher, around 0.7930, this morning.

The NZD/USD gapped higher yesterday morning, after the release of NZ Q3 retail sales data (1.5%q/q vs. consensus expectation of 0.8%). It continued to push higher into the early evening, popping its head above 0.7970. However, it subsided in the backdrop of broad USD strength overnight to trade around 0.7930 currently.

NZD/USD resistance remains around 0.7980, while support is eyed at 0.7840.

The NZD is also stronger on most of the crosses, especially relative to its European peers. With the prospect of further ECB stimulus, including sovereign bond buying, the NZD/EUR has pushed up to 0.6370. This is its highest level since early September. Meanwhile the NZD/GBP has pushed back up to 0.5070.

The NZD/AUD popped higher after yesterday’s NZ retail sales data before flat-lining until the early hours of this morning. It has then pushed a little higher to trade just below 0.9100 currently. Resistance is now eyed around 0.9160.

There are no domestic data releases today so attention will fall across the Tasman, on the RBA Minutes and speech by RBA Governor Stevens.

However, the focus for the domestic market will be the latest GDT dairy auction to be held in the early hours of tomorrow morning. We are hopeful of at least some signs of further stabilisation.

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Majors

The USD has strengthened overnight against most of its peers. The EUR has led the declines.

The EUR was on the back foot from early evening. This was compounded as the night progressed by comments from ECB officials. ECB’s Mersch said the ECB’s unconventional measures could “theoretically” include sovereign bond purchases.

Later, ECB President Draghi made the statement more explicit. The EUR/USD slipped further on the prospect of additional easing measures. It trades at 1.2460 currently. The GBP/USD was dragged along for good measure. From early evening highs above 1.5730 it now trades at 1.5640.

The spotlight was on the JPY early yesterday afternoon as Japan’s Q3 GDP was released (-0.4%q/q vs. 0.5% expected). As the data confirmed Japan was back in recession the USD/JPY abruptly spiked above 117.00. However, the market was quick to reverse the move, likely mulling over the fact it will now be almost certain that PM Abe will delay the Government’s planned tax increase. The USD/JPY touched intra-night lows around 115.50 before returning to trade at 116.40 this morning.

Elsewhere US data delivery was generally on the low-side of expectations (Empire Manufacturing, industrial production). But with the focus on Eurozone developments the USD index was still able to push higher to trade at 87.90 this morning.

The AUD/USD trades a little lower this morning, at 0.8720, approaching the release of RBA November Minutes today. These are not expected to throw up much that is market moving. The market continues to see the RBA on hold for a prolonged period, with a small chance (circa 20%) of a further 25bps rate cut next year.

This evening, RBA Governor Stevens is scheduled to speak.

Tonight the German ZEW survey will be released. The US NAHB housing market index is also due.

All its research is available here.