PPI and inflation expectation data shifts the NZD although the dairy results don't. USD helped by good housing data, weaker euro

By Kymberly Martin

The USD was broadly stronger against its peers overnight, particularly weak European currencies.

Both the EUR and German bond yields fell early in the evening as the ECB’s Coeure suggested the Bank will front-load its bond buying programme in May-June ahead of an expected seasonal lull in mid-July to August. He also expressed some concern regarding the recent rise in bond yields saying it was “yet another incident of extreme volatility in global capital markets showing signs of reduced liquidity”.

The EUR showed little response to the German ZEW survey, despite it highlighting risks to the recovery. But the EUR took another step down after the release of stronger than expected US housing data. The EUR/USD trades at 1.1150 this morning, down from 1.1300 last evening.

The USD index benefitted from EUR softness and also gapped higher against all its peers on the release of strong April housing data. This was a relief for a market ever hopeful that data will rebound in 2Q after “weather-related” 1Q softness. The USD index trades at 95.30 this morning,

The GBP gapped lower after the release of UK CPI data. The core annual reading (which the BoE targets), of 0.8%, was at its lowest level since 2001, while headline inflation was at -0.1%. The GBP/USD finally found support at 1.5500 overnight after falling from early evening highs above 1.5650.

The NZD/USD fell yesterday morning after softer-than-expected NZ PPI data for 1Q. However, most of the negativity was due to declines in commodity prices.

The currency’s bigger response was saved for the release of the RBNZ inflation-expectations survey. As the data reduces the odds of a near-term RBNZ rate cut the NZD shot higher.

As our economist noted “I never thought I’d live to see the day when a decimal point change on the RBNZ inflation expectations variables would move NZD at least half a cent. But that’s what’s occurred.” It suggests the market is positioned to for negative outcomes at present.

However, the NZD/USD did not hold onto its gains. Having peeped above 0.7440 last evening it drifted lower in the backdrop of a stronger USD overnight.

The night’s GDT dairy auction results (-2.2%) also provided no reason for a relief bounce. The NZD/USD trades at 0.7340 currently.

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Kymberly Martin is on the BNZ Research team. All its research is available here.