By Mike Jones
It’s been a fairly volatile ride in the NZD so far this week. The NZD/USD has spent the past 24 hours oscillating wildly in a 0.7500-0.7580 range.
Yesterday’s October retail sales figures were terrible. We thought they would be, given that September sales were boosted by a pre-GST hike spending splurge. Total sales dived 2.5%, following a 1.7% rise in September. Sure, there were technical one-offs at play, but there can be no denying household spending remains subdued at heart.
The size of the sales drop certainly caught the market on the hop. The knee-jerk reaction saw the NZD tumble around ½ cent against both the USD and AUD, in the case of the NZD/AUD to fresh 10-year lows around 0.7540. Heavy selling by momentum and model accounts saw NZD/AUD extend its losses through the afternoon.
Overnight, the NZD/USD shrugged off part of yesterday’s losses, thanks to a broad-based weakening in the USD. Market sentiment was bolstered by a successful Spanish bond auction and soothing words from ECB President Trichet. Global equity markets posted modest gains, indicative of a mild firming in risk appetite. In response, speculative accounts trimmed “safe-haven” positions in the USD. Against the retreating USD, EUR/USD drifted up from 1.3400 to almost 1.3500, AUD/USD once again flirted with 1.0000 and NZD/USD climbed back above 0.7500.
For today, initial direction in the NZD/USD will come from this morning’s (8:15 NZT) policy statement from the US Federal Reserve. Thin market conditions and reduced liquidity could exacerbate the already higher than usual volatility associated with FOMC announcements. Keep an eye out as well for Australian consumer confidence figures (12:30pm NZT) and a speech from RBA assistant governor Debelle at 1pm.
In the short-term, headwinds are expected on NZD/USD rallies towards 0.7600, with initial support eyed towards 0.7440.
After a topsy-turvy sort of night, the USD has finished up marginally weaker relative to most of the major currencies.
Early in the night, a spurt higher in the EUR/USD paved the way for a broad-based weakening in the USD. Market chatter suggests EUR gains were underpinned by rumours of central bank buying and an unwinding of EUR short positions in the lead up to this morning’s FOMC meeting.
A successful Spanish bond auction may have also bolstered EUR sentiment. Spain issued around €2.5b of short-term (12-and 18-month) bills at yields around 100bps above November’s auction. Still, European sovereign bond spreads continued to drift higher, suggesting position squaring was the bigger driver of the EUR rally. From below 1.3400, EUR/USD climbed to an overnight high of nearly 1.3500, helping AUD/USD poke above 1.0000 and USD/JPY dip from 83.50 to around 82.90.
Later in the night, the USD bounced back. Once again the key driver appeared to be rising US bond yields. In fact, 10-year Treasury yields finished the night some 10bps higher (at around 3.38%) after encouraging US data buoyed hopes US economic momentum is gathering pace.
US November retail sales beat analyst expectations, posting the 6th straight monthly gain (0.8%m/m vs. 0.6% expected). Meanwhile, producer price data helped allay deflation concerns, rising 0.8%m/m in November (compared to the 0.6% expected).
Against the broadly stronger USD, EUR/USD was knocked from around 1.3500 to below 1.3400, USD/JPY rebounded to 83.50, and GBP/USD dived from above 1.5850 to closer to 1.5800. Losses in the GBP came despite another strong UK CPI print (3.3%y/y vs. 3.2% expected). Inflation has now been above the Bank of England’s target for 12 months and, with UK inflation expectations creeping higher, there appears to be scant headroom for the BoE to ease policy further.
This morning’s FOMC statement looks set to be the highlight of this week’s event calendar. Any marked changes to the Fed’s economic outlook and/or quantitative easing programme could have a large bearing on USD sentiment in coming weeks.
Analysts are on the lookout for any indication the Fed is now less likely to fully implement its QE plans, following recent better news on the US economy. Such an outcome would likely send US bond yields and the USD rocketing higher. However, we think the sorry state of the US labour market, not to mention still subdued core inflation, argues against any such move just yet.
* Mike Jones is part of the BNZ research team.