Fed confirms taper plan; China data disappoints; US data mostly better than expected; NZ consumers 'euphoric'

by Raiko Shareef

NZ Dollar

The NZD has been the best performer amongst its peers over the past 24-hours despite sitting little changed relative to the USD this morning.

The resilience of the NZD has occurred despite a poor result in China’s PMI for February, and a general inclination to support the USD. The NZD/USD sits around 0.8280 this morning.

Yesterday, local data releases failed to gain much reaction.

The NZ Producer Price Indices fell on a quarterly basis, which would have been a surprise to market participants. But with an outsized contribution from falling electricity generation prices, the print did not materially change our view of an underlying rise in inflation.

Consumer confidence fell very mildly, but the overall level remains euphoric in a historical sense.

The release of the HSBC Chinese PMI yesterday afternoon saw the NZD/USD shunted 0.4% lower, but this was clawed back overnight.

Yesterday, we suggested that the data could break the NZD/USD out of its well-trod 0.8280-0.8380 range. It did, crashing through support levels to briefly take the NZD/USD below 0.8250.

But last night’s recovery puts us back at the bottom end of the range.

Today we have only the monthly NZ Crown Financial Statements, which are almost never market moving. The NZD/USD will take its cues from abroad.

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Majors

Last night was one of broad USD strength, with USD gains against all the majors except for the NZD.

Perhaps the underlying tone for the day was set with the release of the US Fed Minutes from its January meeting, yesterday morning.

Most importantly, it seems highly likely that the Fed will continue reducing asset purchases by US$10b at each meeting, barring any calamitous event in global markets. As an indication of what ‘calamitous’ might be, January’s emerging-market turmoil barely warranted a mention.

Later in the day, the February HSBC manufacturing PMI fell from 49.5 to 48.3, according to the advance reading. This was much weaker than expected, with the market picking the series to remain unchanged.

While there are no doubt seasonal impacts of the Chinese New Year holiday involved, the data were decidedly downbeat. As a result, the AUD/USD was sold heavily, falling by 0.7% on the release. It has since recovered about half of that loss, and currently sits at 0.8980.

PMI outturns from the euro-area were mixed overnight, but overall can be characterised as marginally negative. The composite euro-area PMI unexpectedly fell from 52.9 to 52.7 in February, suggesting that the single currency bloc’s recovery is struggling to gain momentum.

That said, the index remains near the 31-month high set in January. The EUR/USD sits slightly lower at 1.3700 this morning.

However, the most interesting dynamic was the reaction to US data overnight. For two weeks now, the market has been disregarding poor prints from US indicators, willing to make allowances for bad weather.

Last night saw the US Markit PMI print higher than expectations at 56.7, bouncing to the highest level in four years. On the other hand, the Philly Fed Index plunged from 9.4 to -6.3, against expectations of a much milder fall to 8.0.

The market chose to focus on the Markit PMI, pushing the USD higher. The US Dollar Index is 0.4% higher this morning at 80.40.

There is much less event risk today, with few top-tier data releases. The highlight will likely be UK retail sales. Canadian retail sales and US existing home sales are also due.

All its research is available here.