By Mike Jones
Once again we start the day with the USD still under pressure against most major currencies; though for the NZD it’s been a case of hugging the US74 cent level rather than posting any notable gains. In our market flows we continue to see evidence of real money and trading accounts differentiating due to economic and policy outlook.
So for New Zealand and the UK, where less hawkish rhetoric from central authorities holds sway, the outcome is their respective currencies trail lower on cross rates. Certainly in the case of the UK where a second phase of quantitative easing is still on the table for many analysts the GBP lags the recent rally of the EUR, AUD and many Asian currencies.
On the home front we have the NZD/AUD now at the 0.7600 level, extending to lows last seen in April of this year, and just in time for those Kiwi’s escaping to the Gold Coast for school holidays, ouch!
Yesterday’s August merchandise trade figures were close to market expectations. The $437m monthly deficit was smaller than our expectations – boosted to some degree by the re-export of a large aircraft ($54m) and unusually low petroleum and product imports that were down 26% y/y.
Overall exports were up 14.8% y/y and imports up 3.6% y/y (imports ex oil were up 12% y/y.) The gains in exports and imports were both less than expected and coupled with the unusual items gives a softer underlying feel to the data from an indicator of activity point of view. Exports were supported by strong commodity prices, with dairy products leading the way. Milk, butter and cheese exports were up 38% y/y. There were also no surprises in yesterday’s money and credit aggregates.
They remained, in August, about as damp as they’ve been all year. Business, agriculture and consumer credit are effectively going sideways, still. The potential saving grace is stock-of-lending figures (as opposed to just new lending), they might well reflect the impact of de-leveraging. Paying down debt, in old fogey speak. Even so, any such process would seem only in its nascent stages, in that the ratio of debt to income is hardly much lower than when it peaked a year or more ago.
Some of the stalling in the credit aggregates no doubt reflects weak demand for fresh funds as well, in any case.
Today we have the National Bank Business Outlook at 3:00pm; it should be the most important release of the week. As mentioned, on balance, our gut feel is businesses’ optimism will ease a bit further. On the day expect continued support in the 0.7350/0.7370 window while the 0.7410/0.7430 area will provide some resistance.
Overnight the USD has generally remained under some pressure, the AUD trading above US97 cent and the EUR progressing to the 1.36 handle. A stronger HSBC update on Chinese PMI, positive updates on European confidence indexes and lower demand for funds at the ECB’s 3 month LTRO funding operation all played their part in a softer USD deferring to risk sensitive currencies and the EUR. The ECB’s LTRO required just EUR 104bio in demand, less than half of the EUR 225bio rolling off tomorrow. Euro zone executive and consumer confidence in the 16 nations improved to 103.2, its best level since the start of 2008.
Their manufacturers sentiment index improved to -2 from a prior -3 while the services sector improved to 8 from 7, & retailers sentiment improved to -1 from -3. Ahead of Friday’s official PMI update the HSBC version of Chinese data improved to 52.9, up from 51.9 in August. Of course improving data should be generally supportive for the risk environment. Yesterday’s Tankan updates from Japan were an improvement on forecasts; however any enthusiasm was dampened by less encouraging updates on the 3 month outlook from both large and small manufacturers.
The day ahead brings us Australian data in the form of August Building Approvals and Private Sector Credit updates. From Japan we will see a myriad of releases, including Retail Trade, Industrial Production and the Nomura/JMMA Manufacturing PMI.
Tonight there’s a busy US calendar of GDP readings from Q2 as well as PMI updates. Important to note will be the Irish government’s announcement about the full cost of the rescue of AIB, especially in light of recent S&P commentary. It’s almost a case of simply changing the tenor in a paragraph from yesterday’s report.
This time it’s the US 7Y Treasury auction that has been well bid at record low rates in US markets. The average yield was 1.89%, the bid to cover ratio improved to 3.04. Finally, despite the risk appetite evidenced in FX markets equity indices on both sides of the Atlantic are marginally easier, it seems sovereign concerns are colouring investor sentiment for now.
* Mike Jones is part of the BNZ research team.