NZDUSD down 0.7% to 0.7235 and NZDAUD down 0.3% to 0.9255; USD extends recovery as geopolitical tensions ease; JPY and GBP underperform as safe haven flows reverse

By Jason Wong

The USD remains in the box seat, extending yesterday’s gains, as geopolitical concerns ease and with strong data providing a supporting role.  The NZD, GBP and JPY have underperformed, while global bond yields are higher as safe haven flows reverse.

We reported yesterday morning the influential NY Fed President Dudley’s comments on his unchanged outlook, supporting the case for further Fed hikes.  This supported a stronger USD and we have seen that move extended over the past 24 hours.  Receding concerns about the prospect of US-North Korea military action supported that move and saw previous flows into safe havens reverse.  North Korean state media reported that Kim Jong Un decided not to fire on Guam and South Korean President chimed in, vowing to avoid a conflict at any cost.

This backdrop saw a broadly based increase in the USD.  It got a further kick up following a trifecta of positive US economic news, but much of that boost has now unwound.  US retail sales for July were much stronger than expected and there was a decent upward revision to the previous month.  Homebuilder sentiment improved and the Fed’s Empire Survey manufacturing survey was much stronger than expected, rising to a 2½ month high.

So the various USD indices sit 0.4-0.5% higher.  JPY and GBP have underperformed, the former owing to better risk sentiment and the latter following softer than expected CPI inflation data, adding to the run of weaker UK data and dulling the case for higher policy rates.  USD/JPY is up 0.8% to 110.50 while GBP/USD is down 0.8% to 1.2860.

The NZD has also underperformed, down 0.7% to 0.7235 and hovering close to the lows for the session this morning.  The latest GDT dairy auction defied some of the more positive indicators leading up to the auction and showed a slight fall in pricing.  But much of the damage to the NZD was done prior to that.  We have previously noted the vulnerability to the downside for the NZD, given the lop-sided net long speculative positioning.  Last week we published research illustrating that following the last previous four episodes where positioning was so lopsided, the NZD has shown chunky falls over the subsequent 4, 12 and 24 weeks every single time.

The NZD is flat against the underperforming GBP and JPY and is lower on the other crosses, with NZD/AUD down 0.3% to 0.9255 and NZD/EUR down 0.3% to 0.6165. 

Get our daily currency email by signing up here:

BNZ Markets research is available here.