NZ$ weakens vs A$ after strong than expected Australian retail spending reduces likely gap between Aussie and NZ interest rates

Throughout our Thursday the NZD tended to struggle, caught with some pressure on NZDAUD positions after decent Australian retail numbers – though it has to be said this week's NZ data offerings have been robust & yesterday’s Terms of Trade was no different.

 

The weight on the NZD in part illustrated it would seem by two features of our flows; some paring of hot money accounts NZDAUD positioning ahead of the long weekend in North America and some crimping of spreads in the OIS market, as the Australian leg pared some of the easing expectations for the RBA.

 

Looking at yesterday’s local data one gets absolutely no sense of world growth or financial fears feeding into prices for NZ commodity exports, at least to date, according to the August ANZ index.

 

Sure, world prices for NZ commodities eased a bit in August, down 1.2% in the month. In NZ dollar terms, prices were flat – thanks to a dip in the NZ dollar.

World prices are still more than 20% higher than a year ago, and very elevated relative to history. The dip in August was in line with the general drift lower that we were anticipating a few months ago – and even a bit stronger than we thought might have been the case heading into the release. This fits with the general picture that agricultural commodities have held up relatively well during the latest turbulence. Supply issues across various products are part of this. Keep an eye out for the next, and real-time, assessment of at least global dairy prices via Fonterra’s next auction in the wee hours of next Wednesday morning.

 

The June quarter Overseas Trade Indexes were about as solid as we expected. The merchandise terms of trade, in increasing a further 2.3%, struck a fresh 37-year high (sure this is a little bit “old news”, however it doesn’t look as though much, if any, has been given up in July/August, all the more remarkable in the context of the global turmoil. On the volume side, exports, at 0.5%, were slightly below the 1.0% we were looking for, and imports looked okay rather than strong. None of this is any real drama for our Q2 GDP pick, of 0.4%.

 

This morning we start the day near 0.8510 against the USD, and steady at the 73.00 level on the TWI. Support initially pegged at the 0.8475 level, while the lid has been coming down over the past two days & 0.8550 should provide resistance at first glance on the day.

 

Weak European factory output

The European morning was dominated by anticipation of and reaction to the latest PMI numbers across the Continent. First to hit the wires was a disappointment from Italy with a three point decline to 47.0. France produced its’ secondly month number below 50 whilst even German only clung onto positive territory with 50.9. When aggregated, the overall EU PMI fell to 49.0; its lowest level in exactly two years. The EUR came under immediate pressure, falling from USD1.4370 to 1.4310 and the tone was set for a generally more risk-averse session, weighing on sentiment in most of the major equity markets.

 

With rumours – totally unsubstantiated – of funding difficulties in the French banking system, the EUR continued to come under pressure, most notably against the CHF, which fell almost 2 cents in less than two hours as the SNB was – once again – notable only for its absence in the FX market.

 

In an environment where the EUR is looking a bit friendless, some direct action may now be required to arrest any further decline in this pair. Spain auctioned 5Y debt last night – some mixed opinion on well this went in commentary though there’s agreement that without ECB support in the secondary market the outcome would be much worse, the price today some 38bp below the early July auction but the bid to cover ratio fell markedly.

 

US weekly jobless claims fell 12k to 409k as the impact of the Verizon workers strike was unwound and the market nervously awaited the August ISM Manufacturing Index from the United States.

In this event, this came in at 50.6; only a slight drop from July and fully two points ahead of consensus expectations. More importantly, it did not drop below the 50 threshold and has now been above this level for every month since July 2009.

 

That said, the details revealed the index is not quite as good as it looks at first sight. Whilst new orders were steady at 49.6, there was a four point drop in both new orders and export orders. Employment fell one and a half points but a three point jump in inventories will have flattered the headline number.

 

After all, inventories up and production down clearly suggest some softness in final demand, the detail far from strong and are indeed consistent with further slowing in the already anaemic pace of US economic growth.

 

UST’s fluctuated with the data releases but generally have a bid tone going into tonight’s Payrolls release – one or two revised lower forecasts noted in commentary as dealers prep for the number (median forecast is a +68k outcome, versus +117k in July).

 

The CRB trimmed recent gains on a circumspect view on growth in the pits of the CME, while Wall Street after earlier attempts to rally failed has slumped through the NY afternoon to lose about 0.75% - most European indices etched out light gains, though the DAX gave up 1%.