Disappointing US data

Currencies

NZD makes gains against the AUD as markets bet RBA will cut rates; eyes now on NZ trade balance which might be larger than expected

27th Nov 14, 8:10am by bnzeconomists

By Kymberly Martin

NZ Dollar

The NZD/USD has pushed up to trade around 0.7880 this morning, in the backdrop of a broadly weaker USD.

The NZD/USD traded a fairly tight range through most of the day yesterday.

In the early hours of this morning, it caught a tail-wind from a broadly weaker USD on the back of disappointing US data deliver.

From around 0.7810 the NZD/USD now trades at 0.7880.

The NZD/AUD popped through key resistance last evening to trade at its highest level since late July, at 0.9230. The move higher in recent days has been assisted by the market increasing expectations for further RBA rate cuts.

The market now prices a 60% chance of a further 25bps cut by 2H next year. Crucial for these expectations may be the release of AU capital expenditure data today (see Majors). Any disappointment would likely see the NZD/AUD extend its gains near-term.

The NZ trade balance will be released today. We expect the merchandise trade figures will reflect more of the recent decline in dairy prices, such that October’s export values are down around 12% on a year ago. This, along with the 5% annual gain in goods imports we expect, would deliver a monthly deficit of NZ$898m (consensus -NZ$642m).

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Majors

The USD was broadly weaker overnight in the backdrop of generally disappointing US data delivery.

In the backdrop of fairly flat equity and commodity markets, USD weakness was the main theme.

This followed a slew of US 2nd tier data releases in the early hours of this morning that were generally disappointing. Notably, Oct durable goods (ex-transport) came in at -1.3%m/m (1.0% expected); Nov Chicago PMI (60.8 vs. 63.0 exp.); Oct pending home sales (-1.1% vs. 0.5% exp.). As US bond yields declined the USD index fell from 88.00 to 87.60.

European currencies were key beneficiaries. The EUR/USD has extended its recent rebound. From intra-night lows close to 1.2440 it now trades at 1.2510.

Overnight, UK Q3 GDP came in line with expectation, at 0.7%q/q (3.0%y/y) but the details were not very encouraging. While consumption was slightly above expectation, capex was disappointing at 1.0%q/q (2.3% expected). The GBP/USD touched overnight lows after the data, but soon rebounded as the USD weakened. From 1.5680 the GBP/USD now sits around 1.5790.

The JPY also strengthened overnight. The USD/JPY now sits around 117.60. We see the USD/JPY in a period of consolidation after recent huge gains. Ultimately we see further USD/JPY strength in 2015.

The AUD/USD also rebounded from intra-night lows around 0.8480 to trade at 0.8530 currently. Today, it will be all eyes on the release of AU Q3 capital expenditure data. The RBA remains concerned whether non-mining capex steps up to fill the void left by mining. Our NAB colleagues are looking for a 0.6%q/q decline (consensus -1.9%) in Q3. More important may be the latest estimate for 2014/2015 capex. The NAB Business Survey points to some modest upgrade to estimates. This may be sufficient to offset the negative sentiment created by the Q3 outcome. Still, the AUD/USD looks technically vulnerable, with little support seen above the 0.8320 level.

Tonight, the US celebrates Thanksgiving Day. German unemployment, retail sales and CPI data will be released along with the EU business climate indicator.

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Source: RBNZ

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5 Comments

by Stephen L | 27th Nov 14, 10:24am 1417037093

So what will Mr Wheeler do? The exchange rate is stubbornly high. Europe, China and Japan are still aggressively playing currency wars. Aussie is looking like joining them, with rhetoric at least if nothing else. Inflation is already at the absolute bottom of Wheeler's acceptable range. Oil prices remain super low.

Does he cut interest rates, and blow asset bubbles, while increasing the current account deficit?

Does he print money and either fund government spending- like Japan, China, now Europe, or at least buy foreign assets to drop the dollar?

Does he institute some form of capital management or controls on banks source of funds?

Does he sit on his hands and pretend inflation will stay above 1%; or somehow pretend there was little he could do about it?

by Stephen Hulme | 27th Nov 14, 12:26pm 1417044375

A larger portion of recently outsize nominal GDP growth needs to be transferred to labour rather than capital - the low inflation issue would then resolve itself.

There has been a long-term downward trend in the share and strength of labour in national income, which is depressing both demand and inflation. This has prompted ever more expansionary monetary policies. While understandable, indeed appropriate, within a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance (leverage). Read more - HT BH

by Stephen L | 27th Nov 14, 2:58pm 1417053480

Stephen,

Interesting data and link thanks; and a good reflection of the dilemma faced by the Reserve Bank- in my view a Bill English own goal driven by a single target, pretty much single tool prescription for the RBNZ when much of the rest of the world has moved on. Determinedly not competing in the currency wars is why the NZD is considered in the media as the most overvalued currency in the world.

The solution in the paper you link to looks fairly US centric, and I'm not sure would work well here, or even be optimal in the US.

A week or so ago I mooted here a more simple measure to keep inflation above 1% without relying only on the OCR (a drop in which would only really help the relatively wealthy leveraged homeowners, and not the mass of non house owning workers). The simple measure is a drop in income tax at the bottom end (so enjoyed by all to be politically acceptable) funded by the RBNZ through the Treasury until inflation is projected to be within the target bands. Would stoke demand to help business, but not add to their costs.

Others mooted a drop in GST; or government infrastructure spend, and they could work also. I prefer the tax cuts, including a boost to WFF if need be.

by steven | 27th Nov 14, 1:57pm 1417049859

He cuts the OCR, and keeps the LVR, maybe even tighens it 5%. Asset bubbles is beng blown all over the world, with cheap foreign money in housing, art, assets etc, anyway. Frankly our RB holding up the OCR will have no effect on the drivers of these bubbles (excepting the LVR for FHBs) in and by itself. What it will do is damage [small] business and looks to be doing is the worse outcome.

regards

by notaneconomist | 27th Nov 14, 3:29pm 1417055349

English and Wheeler need to review the policy targets agreement urgently.......we have a choice as to whether we manage deflation or allow things to go tits up due to offshore influences.

There appears to be a lot of reliance on the Christchurch rebuild in 2015...and while it is the biggest spend year.....it is best to ignore the effect of that and concentrate on the broader economic issues!!