by Raiko Shareef
NZ Dollar
The NZD/USD was shunted around with the rest of the majors as markets responded to the US retail sales report.
But overall, the currency is little changed, just 0.2% higher at 0.8630.
On the crosses, the NZD/EUR gained by 0.6% to 0.6300, as data and news released overnight were in favour of ECB action in June.
The cross looks to challenge its 2014 high of 0.6342.
Even accounting for the prospect of an ECB rate cut and continued talk of quantitative easing, we still expect the cross to drift towards 0.61 into year end.
The NZD/GBP and NZD/AUD also registered solid gains as the NZD outperformed its peers overnight.
Today’s domestic calendar is action packed. First up, the RBNZ’s semi-annual Financial Stability Report will be released at 9am NZT.
While the themes of the report aren’t expected to be surprising, there is a good chance that market-moving headlines will emerge from the Q&A session with reporters immediately following the release.
A second round of headlines can be expected just past midday, as the Governor and senior management front up to the Parliamentary Select Committee.
Between those two appearances, New Zealand’s retail sales data for Q1 2014 is due. We are looking for a 0.8% m/m rise, which would take the annual pace of expansion to 4.0%.
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Majors
The USD is stronger this morning, despite some (misleading) headline weakness in retail sales. The ‘big dollar’ was given a helping hand upward by some EUR-negative data and news.
Major currencies rallied against the USD as data showed that US retail sales rose by just 0.1% m/m in April, against expectations for a 0.4% rise. Much of that rally was unwound, however, as markets registered the fact that the March data was upgraded from +1.1% m/m to +1.5% m/m, the fastest monthly pace since March 2010. Supporting a positive USD story, the NFIB Small Business Optimism index beat expectations for a modest improvement, shooting up to 95.2 from 93.4 in April. This is the highest reading the survey has printed since late 2007.
The USD also benefitted from news flow that supported the prospect of fresh ECB easing in June. First, the German ZEW survey’s expectations component registered a sharp fall from 43.2 to 33.1. The fact that the current situation component improved was largely overshadowed.
But what got more airtime was a Dow Jones article regarding the Bundesbank. The piece concluded that Germany’s central bank would support further stimulus from the ECB if the June forecasts depict a downgraded inflation track. For years, the Bundesbank has been the most trenchant opponent to extraordinary monetary policy measures. This reported shift in its mindset lends ECB President Draghi considerable support if he decides to cut interest rates in June, or even engage in quantitative easing. As a consequence, the EUR is worst performing major currency overnight, falling 0.4% against the USD to 1.3670.
Closer to home, the AUD was temporarily pushed lower by a set of disappointing Chinese data. Industrial production, retail sales, home sales, and investment all came in marginally below market expectations. While poor data continues to inspire talk of Chinese stimulus, we see little appetite for the large-scale economic packages of recent years. The AUD shrugged off an initial sell-off to open just slightly lower this morning at 0.9360.
The market reaction to Australia’s Federal Budget was decidedly muted, with the budget balances largely in line with expectations. If anything, the GDP growth forecasts presented by the government look somewhat conservative compared to the expectations of our NAB colleagues, so there is room for the budget to outperform in coming years.
Tonight, we’ll be most interested in the Bank of England’s quarterly Inflation Report, amid a growing chorus that policy tightening might be brought forward.
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