By Mike Jones
Yesterday’s July retail sales figures were never going to be strong. And they weren’t.
The 0.4%m/m dip in total retail sales even managed to disappoint the market’s very modest expectation of flat sales in the month.
Still, the near ½ cent plunge in the NZD/USD in the wake of the figures, from 0.7340 to around 0.7300, looked like an overreaction to us given the underlying retail sales trend remains positive, albeit only modestly so.
Overnight, the losses in the NZD were reversed, and then some.
In fact, the NZD/USD came within a whisker of making new 8-month highs. Broad-based USD weakness propelled most of the major currencies higher overnight, and the NZD/USD was simply dragged along for the ride.
US bond yields dived amid renewed speculation the US Federal Reserve will be forced to restart quantitative easing in an attempt to revive the US recovery.
Indeed, Goldman Sachs hit the wires suggesting a new asset purchase scheme (worth up to US$1trln) could be announced as early as November.
Adding to the USD’s woes, USD/JPY slumped to fresh 15-year lows after Japanese PM Kan managed to fend off a leadership challenge (meaning intervention to stem JPY strength is now seen as less likely).
Against the broadly weaker USD, EUR/USD was launched from 1.2850 to above 1.3000, AUD/USD climbed to 2-year highs of nearly 0.9450 and NZD/USD rose from sub-0.7300 to test stiff resistance around 0.7395.
Still, the NZD fell relative to most of the crosses, indicative of the extent to which the sliding USD was responsible for last night’s NZD gains. Looking ahead, we expect to see solid gains in today’s electronic card transactions data for August as consumers begin to bring forward spending ahead of the October 1 GST hike.
Also note Fonterra’s (now) fortnightly auction is scheduled for early Thursday morning (NZT).
Initial resistance for NZD/USD is still eyed towards July’s 0.7395 high, with support towards the overnight low of 0.7280.
Developments in financial markets presented something of a perfect storm for the USD overnight. Buoyant risk appetite, sliding US bond yields and strong gains in EUR and JPY combined to produce the biggest one day loss in the USD index since July. Most of the major currencies were propelled significantly higher as a result. The USD’s woes started with a dive in USD/JPY.
Japanese Prime Minister Kan won a leadership vote over challenger Ozawa yesterday. With Kan widely regarded as having a softer stance on JPY strength, markets’ knee-jerk response to the announcement saw USD/JPY slide to fresh 15-year lows below 83.00. Later in the night, tumbling US bond yields took a heavy toll on the USD. Despite relatively upbeat August US retail sales figures (0.4%m/m vs. 0.3% expected), 2-year Treasury yields slipped 4bps to 0.49% and 10-year yields plunged almost 10bps to 2.67%.
Speculation the Fed could kick off a second round of quantitative easing (QE) helped drag yields lower after the Wall Street Journal reported Goldman Sachs expect a US$1tn QE programme to be announced by the Fed as early as November.
Having tracked a 1.2830-1.2900 range for most of the night, the sliding USD launched the EUR/USD through the key 1.2920 resistance level. Stop-loss orders were triggered and the single-currency eventually settled around 1.3020. Sentiment towards the EUR was also helped by a successful Greek debt auction – the first in two months. In stark contrast to the US, markets in Australia and Switzerland have factored in slightly more tightening from their respective central banks over the past 24 hours, underpinning strong gains in AUD and CHF.
Following yesterday’s robust NAB business survey, Australian markets now price a one in four chance of an RBA rate hike in October.
This, combined with the broadly weaker USD, saw AUD/USD climb to 25-month highs above 0.9400 overnight. Similarly, speculation the Swiss National Bank could hike rates at their meeting on Thursday saw USD/CHF slide through parity for the first time since December 2009. Technically speaking, with the USD index breaking below its 200-day moving average, and the EUR/USD pushing through key resistance at 1.2920, there is scope for additional USD weakness in the short-term.
The next resistance level for the USD index kicks in around 80.50. Event risk will come from tonight’s Eurozone CPI figures for August, US industrial production figures and the September edition of the NY Empire manufacturing index.
* Mike Jones is part of the BNZ research team.