USD traded lower overnight, down moderately against all majors; European currencies rose overnight, reflecting a soft USD; NZD has generally underperformed, up just 0.1% against a weaker USD

By Doug Steel

A lower US dollar featured in overnight markets, as US yields dipped. Oil prices rose, while equities were mixed.

The IMF lifted its global growth forecasts overnight, in another sign that world economic growth has been performing better than expected through 2017. The Fund sees better prospects for all the world’s advanced economies including US, Europe, China and Japan. The outlook for the UK and Spain were unchanged. Overall, global growth forecasts have been lifted to 3.6% for 2017 and 3.7% for 2018, both an increase on 0.1 percentage points from July’s forecast. Positive for sure, but markets took their cues from elsewhere.

The US dollar leaked lower overnight, down moderately against all the major currencies. It is more confirmation that the recent US dollar rally has run out of steam for now, ahead of the Fed minutes tonight and the US CPI on Friday. The DXY US dollar index is 0.4% lower, down for the third consecutive day and back more than 1% from last Friday’s highs.

A Politico report that cast doubt on whether Senator Paul will support Trump’s tax proposals undermined US Treasury yields and the US dollar. Further US budget discomfort was expressed by IMF chief economist, Maurice Obstfeld, overnight who said ‘whatever the tax reform plan looks like, it should not increase the deficit’. A weaker than expected US small business optimism didn’t help. After leaving USD/JPY around 112.70 yesterday afternoon, the pair pushed lower overnight falling to around 112.00 at one point and opens around 112.30 this morning.

European currencies rose overnight, reflecting the softer US dollar. EUR/USD wriggled its way north through the night, defying near-term political risk surrounding Catalonia. The pair currently sits not far from its highs for the night at around 1.1810, up around 0.6% on the day. GBP/USD also pushed higher, shrugging off a much larger than expected trade deficit but buoyed by stronger construction data offered support. GBP/USD is up 0.5% sitting just above 1.3200.

NZD has generally underperformed, being up just 0.1% against a weaker USD. NZD/USD tested below 0.7060 yesterday after weak electronic card transaction data and comments by leader of NZ First, Winston Peters, who said ‘if you are an export dependent nation why would you go ahead with an inflation dollar’, after more coalition talks. Coalition talks may be completed by Thursday, but the outcome is now not expected until sometime after that. So the uncertainty of government formation will hang over the NZD for a while yet. NZD/USD has traded a tight 30 pip range overnight, currently sitting around 0.7070. But the NZD is lower on the crosses. NZD/GBP is down 0.4%, at 0.5350 and NZD/JPY is down 0.3% at 79.4.

The NZ TWI has now fallen for seven consecutive days. At around 74.70, it is currently testing year-to-date lows and technical support. Importantly, the NZ TWI is more than 4% below the RBNZ’s August MPS projections for Q4 (77.9). On its own, and if it stays here, a lower than anticipated TWI will lift the RBNZ’s inflation forecasts that will have to be factored into upcoming policy considerations. This adds to some other signs that inflation is coming in higher than the RBNZ anticipated.

AUD has consolidated yesterday’s gains following a firm NAB business survey. From 0.7750 early yesterday, the AUD/USD pushed up about 0.4% close to 0.7790, a level it has oscillated around through the night. This has seen NZD/AUD slip back around 0.4% to around 0.9080.

Oil prices have extended recent gains on possible Saudi export cuts and expectations more countries could join in OPEC/Russian production cuts. Brent crude is up 1.3% to around currently sit around US$56.50/bbl. USD/CAD is down around 0.4% on the day, to around 1.2500.

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