No smoking gun in local data; but be ready for fireworks if Yellen indicates the US is cooling

by Raiko Shareef

NZ Dollar

The NZD traded in a very tight range overnight, and is essentially unchanged from yesterday morning’s level of 0.8340.

The NZD/USD has held onto the gains it made as it followed the AUD/USD higher on Monday.

Throughout Tuesday, the currency traded in a very narrow range between 0.8315 and 0.8345. With little on the horizon to provoke a serious challenge of short-term support and resistance, trading within the wider 0.8280-0.8400 band seems to be the game to play.

Yesterday, the RBNZ’s inflation expectations survey saw the closely-watched 2-year measure print at 2.33% for Q1 2014, barely changed from the 2.34% in Q4 2013.

This provides no smoking gun for the RBNZ to hike any more than it has already signalled.

But just as important will be the pricing measures in the ANZ Business Outlook survey, due Friday.

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Majors

Overnight, most major currencies continued to gain against the USD, but it remains a directionless and choppy trading environment.

The JPY has outperformed over the past 24-hours, strengthening on jitters created by the recent eye-popping depreciation in the Chinese yuan (CNY).

Yesterday saw the CNY depreciate by more than 0.5% against the USD. Over the past week, it is more than 1.0% weaker. This sort of volatility is unheard of for the tightly-controlled currency, and has analysts speculating that the People’s Bank of China is attempting to shake out speculative activity.

Whatever the reason, the JPY has benefitted from investors seeking relative safety, gaining 0.3% against the USD, to 102.20.

The US Dollar is broadly weaker, helped somewhat by weaker-than-expected US data. The Richmond Fed manufacturing index fell sharply from 12 to -6 in February, while consumer confidence eased slightly from 80.7 to 78.1 in the same month.

Both measures were weaker than market expectations, but markets remain content to dismiss weakness as largely weather related. The US Dollar Index has drifted 0.2% lower to 80.10.

One wonders how long investors can remain so sanguine.

Some analysts have pointed out that recent indicators seem to be weakening, even once the adverse weather is taken into account. The most recent snowstorm kept new Fed Chair Janet Yellen from testifying to the Senate as part of her semi-annual update to Congress. As a result, we will likely hear what the Fed has to say about the impact of the weather when Yellen fronts up to the Senate tomorrow night.

The central scenario is that she dismisses the recent softening as temporary.

But be ready for fireworks should she even suggest that there might some underlying weakness, too.

Today, construction work data for Australia are due. These are an input into the overall GDP numbers, and the market is picking a modest 0.4% q/q rise. NAB expects 0.0%. Tonight sees German consumer confidence and US new home sales data.

Other news:
* US S&P Case-Shiller house prices rose by 13.4% y/y, in line with expectations.
* UK CBI retail sales printed at 37 vs 15 expected.

All its research is available here.