Chinese PMI comes in below 50; US headline inflation positive surprise; NZD/USD remains well supported

Chinese PMI comes in below 50; US headline inflation positive surprise; NZD/USD remains well supported

By Raiko Shareef

Most major currencies are little changed from yesterday’s levels. A fleeting attempt by EUR/USD to convincingly break above 1.10 prove to be the bridge too far. Poor liquidity once again proved to a feature of FX trading.

The preliminary manufacturing PMIs delivered a series of overs and unders. Japan and China (HSBC) undershot expectations, while Germany and the eurozone as a whole beat expectations. The fallout from the soft China number was limited, with the AUD’s (pitiful) attempt to decline quickly reversed. Nevertheless, the drop below 50 will underscore speculation that China will struggle to hit a 7% growth rate in Q1 2015.

On the whole, US data looked encouraging. The misses in the Richmond Fed index and the house price index were overshadowed by a strong result in the Markit PMI and a stunning rise in new home sales. Despite February’s wintry blast, which dampened myriad other activity indicators, new home sales rose to a seven-year high.

Inflation remains front of mind for Fed watchers, and there, too, was a positive surprise. Headline CPI inflation printed at 0.0% y/y, against expectations for it to remain at -0.1% for a second consecutive quarter. We’d note though that headline inflation may well turn lower again in the near future, as USD strength feeds through onto import prices.

Nevertheless, the series of positive US outcomes has seen US data surprise indices bounce sharply from deeply negative levels. Coupled with some reluctance to break above key levels in the majors (such as 1.10 in EUR), this could entice investors to re-enter their long USD positions.

NZD/USD remains well supported, finding its footing above the 100-day moving average. We’d be cautious on entering a short NZD/USD position just yet, and would wait to see clear signs of waning momentum. Our hunch is that NZD/USD continues to outperform in the near-term.

This morning, Fonterra is expected to affirm its 2014/15 milk payout forecast at $4.70kg/MS, which should be neutral or mildly positive for NZD. An improvement in the local trade balance will also provide no impetus for NZD losses.  Tonight, Germany’s IFO survey and US durable goods orders will be highlights.


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