The USD is sharply higher on a strong durable goods report (and revisions), gaining ground against all the majors.
The Bloomberg Dollar Spot Index is 1.0%. JPY is at its weakest level in 8 years ahead of this week’s CPI report.
EUR sits mid-pack on the leader-board, despite a lack of progress in Greece’s negotiations.
Most of the US data releases overnight printed close to expectations, but the durable goods orders report (arguable the most important) punched the lights out. Not only did core durable goods (ex transport) beat expectations modestly in April, the March reading was revised much higher, from -0.2% m/m to +0.6%. Similarly, core capital goods orders (ex defence and air) printed much stronger than anticipated in April, and the March figures revised from -0.4% to 1.0%.
In truth, the USD’s run higher began even before the US session, thanks to USD/JPY snap through ¥122.0. USD/JPY’s move higher whilst US Treasury yields pushed lower bucks the pattern that has largely prevailed through 2015, where the two tend to move in tandem.
We suspect some nervousness ahead of Friday’s Japanese CPI reading, where core inflation is set to drop from 2.2% y/y to 0.2% as the effects of last April’s consumption tax hike drop out. We continue to expect some further policy easing from the BoJ in H2 2015, and remain long USD/JPY from ¥119.0, targeting ¥125.0, which is our year-end forecast.
NZD was among the worst performers overnight, its decline nearly matching that of JPY. There’s no obvious reason for NZD to have underperformed. We expect to see stronger support at 0.72, ahead of the 2015-low of 0.7177. However, we don’t expect this to hold in the face of continued, broad-based USD strength, or if Fonterra’s 2015/16 payout estimate prints lower than $5.00kg/MS.
There are no notable US data releases this evening, and the fall in Treasury yields overnight may give reason for the USD rally to take a breather. In fact, we will have to wait untilFriday for the next chunk of important US data, including the second estimate of Q1 GDP and the Chicago PMI.
However, the risk remains that non-US factors, such as a soft Japanese inflation report or a failure by Greece and its creditors to reach a deal, hits JPY or EUR hard, and instigates a fresh round of broad USD buying.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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