Markets cruised into the end of last week with relatively little fanfare. Equity markets and oil prices rose slightly, while US yields edged a touch lower.
There was more action in foreign exchange, well, at least comparatively. The GBP stood out by being hurt by lower retail sales in January. It was the third consecutive monthly decline, despite market expectations of a decent bounce this time around. The market didn’t wait to see if this is the beginning of the end of generally better than expected data since the Brexit vote. Having been above 1.2500 earlier in the session, the GBP/USD was quickly thumped below 1.2400 before attempting recovery.
General USD strength added to GBP’s woes, with the DXY lifting 0.5%. German 10 year Bund and UK 10 year Gilt yields both fell nearly 5 bps, a larger drop than the 3 bp decline in US 10 year Treasury yields on the day offering slight favour to the USD over the EUR and GBP. EUR/USD fell 0.5% to close around 1.0620. EUR/USD opens this morning around this level and the GBP/USD around 1.2425.
USD strength also saw NZD and AUD under pressure (with NZD/AUD unchanged around 0.9370). The NZD was already on the back foot during Friday’s local session, dipping in the morning on the simultaneous release of a weaker (51.6) PMI number and headlines from an RBNZ briefing to the new Finance Minister that reiterated global upward pressure on NZD may be turning; the Bank expects policy to remain accommodative; and current policy should see inflation reach goal. The ensuing dip was relatively short lived, given the RBNZ document was dated December last year. The NZD wasn’t helped by weaker than expected Q4 retail sales (along with a slight downward revision to Q3) and, late in the day, a forecast of a sharp slowing in NZ (along with Australian and Chinese) house price inflation from rating agency Fitch. From around 0.7225 early Friday, the NZD dipped close to 0.7200 during the day, easing further toward 0.7180. A mild lift in risk appetite on Friday night couldn’t save the kiwi from slipping a bit further against the USD.
Having cracked 20,000 in late January the Dow has piled on a further 3.1% in less than a month. The S&P close up +0.2% on Friday. The NZD/USD opens this morning around 0.7190 and the AUD/USD around 0.7670.
Our NZD short term fair value model, sitting just above 0.74, still sees the NZD higher. But near term we respect last week’s high of 0.7240 and last week’s lows around 0.7140 on the downside. Today we get the NZ PSI and producer price inflation. The latter should confirm a pickup in annual inflation.
JPY rose on Friday night bucking USD strength, with USD/JPY keeping its correlation with outright US long yields under the BoJ’s yield curve control policy. USD/JPY closed down 0.4% just above 112.80.
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