Downside risk increasing in euro-zone as German GDP falls; Ukraine willing to accept Russia aid; NZD best performer across majors

by Raiko Shareef

NZ Dollar

The NZD was the outperformer amongst the majors overnight, with NZD/USD up 0.4% to 0.8490.

No doubt this performance was helped by a strong Q2 retail sales report, which saw real volumes rise by 1.2% q/q (+1.0% exp.), as well as an upward revision to the previous quarter. This gives us some confidence with our pick for Q2 GDP of +1.0% q/q, to be up 4.2% y/y. It makes clear that NZ’s strong economic story still has some way to run.

The punchy outturn initially saw NZD/USD push toward 0.85, but that was reversed in our session. Overnight, though, NZD/USD broke above that level, but fell shy of 0.8520, failing to trigger stop-loss selling which we expected above 0.8530.

For NZD/AUD, the retail sales number brought pushed the cross back above 0.9100, which continues to be a magnetic level. Recall that early-week trading had been marked by attempts to push the cross into an extended break below that level. This pressure has eased somewhat, which gives our trade recommendation (long NZD/AUD at 0.9090, targeting 0.9260) to sit slightly easier.

There’s nothing on the cards to trouble local players today. We eye initial resistance at 0.8530, and suspect attempts to break 0.8400 will be rejected around 0.8420.

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Majors

Major currencies are little changed against the USD, with the Bloomberg Dollar Spot Index unchanged. The EUR was the focus for the evening, as depressing GDP prints rolled in, but has managed to keep its head above water at 1.3370, similar to yesterday’s opening level.

First off the rank, German GDP fell by 0.2% q/q (-0.1% exp.), signalling the downside risk to overall eurozone growth. That was confirmed with the bloc failing to grow at all for the quarter, against expectations of a 0.1% rise. The annual growth rate slipped from +0.9% y/y to +0.7% y/y.

One can only hope that the ECB’s Targeted LTRO program (due to launch in September) helps to stimulate growth later this year. But we don’t expect the ECB to hang its hat on that – it will continue to communicate its preparedness to ease policy further, with the likely next step asset-backed security purchase.

EUR/USD failed to make fresh headway lower, perhaps relieved that the outturn was not even worse. The reaction was more apparent in the German bond market.

The only other data of note overnight were the weekly US initial jobless claims figures, which disappointed by rising to +311k, a bigger jump than the +295k expected. But the four-week moving average still remains below 300k, having broken below that level in late July. This measure has not been so tight since early 2006 (and even then, only very briefly).

Overnight, commentators are pointing to some easing of geopolitical tensions, with Ukraine apparently willing to accept Russia aid, provided proper inspection. Separately, Iraqi PM al-Maliki is said to be ready to step down in favour of his nominated successor, ending a tense political standoff in Baghdad.

Tonight, UK GDP and a swathe of US data are due, including the Empire manufacturing index, industrial production data, and the U of Michigan consumer confidence reading.

But we suspect attention will start turning to next weekend’s Jackson Hole symposium, where the Fed’s policy and research heavyweights are due to share views on the labour market.

Traditionally, the Fed Chair delivers a keynote speech at the start of the conference, which will be during our local session on Friday. Attached is a primer on Jackson Hole and its market implications from our Sydney-based colleague Ray Attrill.

All its research is available here.