Local eyes on the Consumer Price Index

The New Zealand dollar (NZD) has continued on its path northward overnight and, interestingly, despite the ending of the seven day rally in major offshore equity markets, which are either negative or flat as we write.

There was also more evidence of slower global growth over the past 24 hours. In the US, 2-year treasury yields fell to a record low and oil dropped as weakening US manufacturing data overshadowed better than expected corporate earnings announcements.

Earlier yesterday a slew of Chinese data came out weaker than consensus but remarkably close to what the ‘leaked’ rumours had suggested. It appeared to be a case of sell the rumour, buy the fact, as the Shanghai equity index, along with the kiwi dollar, pared some of its losses initially. While China’s GDP and monthly activity data slowed in annual terms, the slight undershoot on the Chinese CPI was taken by the market as good news, in that it decreased pressure on Chinese authorities to tighten policy further.

While this generally supported the NZ dollar, the big standout currency has been the Euro, which has rallied above 1.2900, its highest level since early May, which, combined with some poor data in the US, set the tone for a weaker USD across the board. A successful Spanish debt auction pleased the market, helping the Euro extend its gains, which were accentuated by stop-loss buying and demand for overnight Euro call options.

After surging above 73 cents first thing this morning, we may see some importer supply cap NZD to start the day but today’s CPI release at 10.45am will be the next piece of news on the radar in this time zone. We believe the Q2 number will affirm still subdued pressures to date and are picking a headline increase of 0.3%, which should set annual inflation at 1.8%. The RBNZ has judged a 0.5%/2.0% combo.

Still, the Bank may not so see any such inflation relief when looking forward. Expect resistance at 0.7325, the high in late April, to limit the topside today with initial support seen at 0.7240.

Majors

A choppy European/US day for equities and risk appetite made for equally volatile narrow range shifts for those major currencies associated with risk such as the AUD, NZD and CAD.

However, while equities plunged late in the European session, predictably boosting the JPY and CHF against the USD, both the EUR and GBP continued what has been a pretty relentless grind higher. In financial markets the ongoing intraday twists and turns often seem to have little correlation with economic data. There is a notable lack of conviction across asset classes, but plenty of churn. After JP Morgan Chase Q2 earnings beat street estimates markets took a larger than expected slide in the New York Empire June manufacturing survey in their stride.

The survey slumped to 5.1 from 19.5 in June. US industrial production for June appeared to be on the positive side with a +0.1% reading against a forecast slip of 0.1%. However, the rise was boosted by a 2.7% m/m boost in utility output (most probably related to air con demand in the warmer weather). Factory output fell 0.4%. A softer Philadelphia Fed survey for July, which slipped to a disappointing 5.1 from 8.0 in June, then helped set the scene for a late session drop in equities. There should be no surprise that USD/JPY fell back from 88.25 to 87.23, while USD/CHF hit a 5 ½ month low at 1.04 – well off an intraday high of 1.0550.

Those moves chimed with the AUD, NZD and CAD all falling back against the USD as risk was cut. What was perhaps harder to rationalise was the continued rise in EUR/USD and GBP/USD. Certainly there is an increasing view among investors that evidence the US economic recovery is losing momentum – witness data on housing, manufacturing, earnings, employment, retail sales and then the overnight downward revision of Fed GDP forecasts – should be seen as a USD negative, especially after the stabilisation of the EUR. However, the equity market’s negative correlation with the JPY and CHF and positive relationship with AUD, NZD and CAD remains.

And that suggests the EUR and GBP should also be under pressure against the USD in times of decreased risk. Our view of the EUR and GBP rise is this is position-related and tied to a market that is being forced to cut existing holdings. For many investors the EUR/USD rebound from sub 1.19 targeted 1.2440 and then perhaps 1.27-1.28. The breach of the latter is leading to stop loss buying and thoughts of a move to 1.30-1.31 with the DXY extending yesterday’s breakdown through support at 84.3 and 83.73.