By Mike Jones
NZD
Yesterday’s retail sales figures continued the run of terrible NZ data. The 0.4% fall in Q3 retail volumes was even weaker than our bottom-of-market -0.1% forecast.
As a result, we’ve further tabbed down our Q3 GDP pick to 0.2%, from 0.3%.
For the NZD, the weak retail figures triggered the expected knee-jerk selling. But it was no rout. After slipping almost ½ cent, solid exporter demand around 0.8160 helped the currency find its feet.
The indications from our Currency Flow Monitor are that NZ exporters remain under-hedged, so NZD/USD dips will likely continue to attract buyers.
Overnight, the NZD/USD resumed its decline as global risk sentiment stuttered. Worries about the approaching US fiscal cliff and geopolitical tensions in Gaza (see Majors) smothered earlier optimism.
Global equity markets notched up modest losses and our risk appetite index (scale 0-100%) fell from 69.4% to 68.6%.
The recent deterioration in the NZ economic backdrop means the NZD/USD is more exposed than usual to any cooling of global optimism and reduction in risk appetite. Indeed, this partly explains why we expect the NZD to underperform the AUD in the short-term.
We’ve previously flagged the risk of a dip down into the lower 0.7700-0.7800 range for the NZD/AUD, ahead of a sustained recovery towards the end of the year.
Important for our view of the NZD going forward is whether the NZ economic weakness in Q3 is just a pothole, or the start of a trend.
Today’s NZ job ads, consumer confidence, and PMI manufacturing data will certainly help inform our view on this. We’d have to see a decent bounce in the PMI in particular (previous 48.2) to keep our view of slow NZ economic recovery, and gradual NZD/USD appreciation, intact.
A late bout of US equity market weakness means the NZD/USD should stay heavy this morning. But solid technical support in the 0.8080/0.8100 window should slow any declines. Keep an eye out for the FOMC minutes due out shortly.
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Majors
It’s been a mixed night in currency markets, with no strong trends or themes. European currencies have outperformed, seemingly on little news.
In contrast, risk currencies like the NZD, AUD, and CAD have suffered from a late sell-off in US stocks, even as commodity prices rallied. The USD simply chopped sideways.
Early session optimism was snuffed out by a combination of fiscal cliff jitters and geopolitical concerns. US President Obama kicked off fiscal negotiations by asking for an extra US$1.6t in tax revenue over 10 years, well above the $0.8b of previous talks. This would involve a harsher fiscal adjustment than most analysts currently assume. US stock markets showed their displeasure, ending the night down 0.4-0.7% after a bright start.
Meantime, risk appetite suffered and oil prices rose on reports Israel had assassinated the Hamas military chief, sparking renewed violence in the region. Oil prices are currently up around 0.8%, at US$86/barrel.
Renewed speculation Spain is poised to ask for a bailout (later disproved) looks to have stalled the EUR/USD downtrend for now. The single-currency bounced back through 1.2700, to sit at around 1.2750 currently. This, despite more lacklustre European data; industrial production for September slumped a further 2.5%m/m.
Tonight’s preliminary European GDP data will be an important test on whether the single-currency can retain a foothold above 1.2700. Analysts expect a 0.1% contraction, which would confirm a technical recession for the Eurozone.
We’d look to fade any EUR/USD rallies on a more positive number given the activity indicators for the fourth quarter (including last night’s industrial production numbers) don’t suggest a recovery is in the offing.
Indeed, momentum in the all-important French and German economies looked to have lost noticeable steam in Q4.
As noted yesterday, we’re not expecting any surprises from this morning’s FOMC minutes. Of interest to investors will be any comments/suggestions around the Fed’s likely response to the end of ‘Operation Twist’.
Other News:
* US retail sales fall -0.3% in October (-0.2% expected), in part due to the impact of Hurricane Sandy.
*Bank of England’s inflation report points to less scope for additional policy easing. UK inflation forecasts were revised up, such that inflation is above target by end 2013 (2.2%y/y). At the same time, the growth outlook has worsened – 2013 forecasts are now just 1.5%y/y.
Event Calendar:
15 November: NZ job ads; NZ manufacturing PMI; NZ ANZ consumer confidence; AU inflation expectations; EU Eurozone GDP; UK retail sales; EU Eurozone CPI; US Empire manufacturing; US CPI; US Philadelphia Fed index; 16 November: US industrial production.
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