Opinion: Flat NZ economy a factor as NZ$ relatively weak overnight despite continued talk of QE II and US dollar

By Mike Jones*

NZD In a strange reflection of the global trends afoot, the NZD/USD climbed to 27-month highs overnight, but still took out the title of the weakest performing currency over the past 24 hours. No surprises that a weak USD largely squares the circle.

Singapore’s monetary authority yesterday announced it would allow a faster rate of SGD appreciation, spurring speculation Asian countries may take a more relaxed view of future appreciation in their currencies. Broad-based gains in Asian currencies triggered another bout of USD selling, dragging nearly all of the major currencies higher.

As a result, the AUD/USD has spent most of the past 24 hours trading in the ‘nervous nineties’, before eventually running out of puff just shy of parity.

The broadly weaker USD also provided the legs for another spurt higher in the NZD/USD – the currency eventually reaching a 27-month high of around 0.7640. Still, the lofty highs in the NZD/USD didn’t last for long. Not only did a bout of profit taking stem the USD’s losses, but the weight of more disappointing economic news tempered some of the recent NZD enthusiasm. Indeed, yesterday’s August retail sales were disappointingly flat.

Sure, the flat result was not too far from market expectations of a small 0.3% rise. But the more one looks at the detail, the more one sees some genuine weakness. Perhaps the clearest sign of such was in core retailing. Total sales excluding the automotive sectors fell 0.6% in the month following a 0.1% dip in July.

The NZ and Australian data calendars offer up little in the way of event risk for today.

As such, direction for the NZD/USD will continue to come from offshore.

Not only is there a wealth of US and European data to keep an eye on, but a speech from Fed Chairman Bernanke may well provide clues of the timing and scope on additional Fed easing. With market participants wary of being overly short the USD going into Bernanke’s speech, we suspect 0.7640 will cap the topside in NZD/USD today.

Majors

Familiar themes prevailed in currency markets overnight. The USD weakened against most of the major currencies, in many cases falling to multi-year lows. On a trade weighted basis, the USD slumped to the lowest since December. The Monetary Authority of Singapore (MAS) surprised markets yesterday by announcing a policy of greater SGD appreciation. The MAS increased the slope and widened the trading band of its currency, the first such move in 9 years.

The move was seen as not only reflective of strong Asian growth, but also a signal Asian countries are perhaps becoming less reluctant to let their currencies appreciate and take the strain of a weaker USD.

In response, USD/SGD dived to an all time low around 1.2900, kick-starting another bout of broad-based USD weakness.

Last night’s US data certainly did the USD no favours. The August trade balance widened by more than expected (-US$46.3b vs. -US$44b expected) and jobless claims jumped unexpectedly (462,000 vs. 445,000 expected), underscoring the parlous state of the US labour market.

Reflecting the broadly weaker USD, EUR/USD jumped above 1.4100 for the first time since January, USD/JPY slipped to fresh 15-year lows, USD/CHF fell to an all time low, and the CAD broke through parity with the USD for the first time since April. In contrast, parity escaped the grasp of the AUD/USD.

Yesterday’s surge in Australian consumer expectations put a bit of extra fuel in the AUD’s tank (3.8% in October, from 3.1% in September), but the AUD/USD could ‘only’ manage a 28-year high of 0.9994.

More market chatter about option barriers and resistance around 1.000 tended to limit the AUD’s gains, spoiling the parity party once again.

In contrast to Singapore’s move, currency intervention from the Reserve Bank of India yesterday stoked fears about an escalation in the “currency wars”.

While unconfirmed, traders suggested the RBI intervened to purchase USD/INR at 44.10.

Looking ahead, tonight’s speech from Fed Chairman Bernanke will be worth keeping a close eye on.

It is essentially the last chance for the Fed to guide market expectations on the size and timing of additional quantitative easing (QEII) ahead of the November FOMC meeting.

The current market consensus appears to expect US$0.5-1.0tn in asset purchases beginning in November. Should Bernanke temper QEII expectations, a sizeable USD short squeeze could result.

* Mike Jones is part of the BNZ research team. 

All its research is available here.