EUR key benefactor from remarkably weak US durable goods orders; USD underperforming other G10 currencies; markets waiting for FOMC and RBNZ announcements

By Raiko Shareef

NZ Dollar

The NZD/USD is off its recent lows, sitting 0.3% higher at 0.7450. It sits at the low-end of the G10 pack, which has gained markedly against the USD.

NZD/USD traded as high as 0.7477, knocking us out of our short position (stop-loss at 0.7475). That crystallises a tidy profit of 5.6%, and we will sit on the side-lines until after the FOMC and the RBNZ tomorrow morning.

The wash-up of those may provide an opportunity to re-enter our short, with an eventual target of 0.70 before year-end.

On the crosses, NZD has performed worst against the EUR, down 0.7% to 0.6560. It still remains well clear of the recent lows at 0.6480. NZD/GBP continues to grind lower, and is now sitting on the cusp of 0.4900.

There are no local data releases today. We pick a 0.7410 – 0.7480 range for NZD/USD.

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Majors

The USD stands lower this morning against all G10 currencies, on the back of remarkably weak US durable goods orders. The EUR was a key beneficiary, up as much as 1.6% for the day, before paring those gains to sit at 1.1360.

Core durable goods orders (ex-transportation) fell by 0.8% m/m in December, against expectations for 0.6% rise. There were also downward revisions to prior months. Business investment was also weak, with shipments falling 0.2% m/m (+1.0 exp.) and orders down 0.6% (+0.9 exp.). There were downward revisions here, too.

This genuine weakness was the major driver of market sentiment, seeing the USD, equities, and bond yields sharply lower. The S&P 500 is 1.2% weaker for the day, having recovered somewhat from its depths after other USD data were better than expected. US new home sales rose by 11.6% m/m (+2.7% exp), and consumer confidence rose to 102.9 (95.5 exp), a fresh 7-year high.

It is remarkable how much impact this single weak report has had. The broad Bloomberg Dollar Spot Index was 1.0% lower for the day, taking back a sizeable chunk of last week’s 2.4% gain. Note that GBP/USD managed to post a 0.9% gain despite UK Q4 GDP surprising on the downside (+2.6% y/y vs +2.7% exp).

This sharp reaction says much about market positioning. The long USD camp has continued to grow (for good reason), but some of the weaker followers are susceptible to being shaken out easily. Signs of a more cautious Fed at tomorrow morning’s FOMC statement would cause even more of them to run.

Any upgraded notes of concern from the Fed about soft inflation, weakness in trading partners, or the stronger USD would likely be taken as a dovish signal.  On the latter, we note that some of the US corporate earnings disappointments this quarter have been ascribed to USD strength affecting the repatriation of profits made offshore.

Our central scenario is that the FOMC simply rolls out a statement largely unchanged from December, and forges toward rate hikes in mid-2015. We remain bullish on the USD over the coming year because of that. But we remain wary of some consolidation here.

The Australian CPI report (see Fixed Interest for details) is the only data of note, ahead of the FOMC at 8am NZT tomorrow.

All its research is available here.