Waiting for Bernanke: US$ strong as markets get that disappointed feeling

By Mike Burrowes

NZD

The NZD has remained in a tight 0.8260 to 0.8330 range as the market waits with bated breath for Bernanke’s speech early tomorrow morning. NZD/USD was better supported overnight, currently trading 0.8280.   

Q2 retail sales excluding inflation expanded an impressive 0.9% (0.6% expected). This supports our view that the economy overall was making some decent progress post the major earthquake in February and prior to the latest ructions overseas. The outturn was not enough to warrant a change to our initial pick for Q2 GDP, which still stands at 0.4%. At least, it now has a tinge of upside risk. The data had limited impact on NZD/USD.

The NZ Food Price index jumped a further 2% in July. As a result of this data we have bumped up our Q3 CPI inflation estimate to 0.8%, which would make for an annual rate of 5.0%. This combined with lofty inflation expectations should keep pressure on the RBNZ to hike rates over the next 12 months. We continue to forecast 125bps of hikes over the next 12 months, in contrast to current market expectations of just 47bps of hikes.

The NZD has made some modest gains on the crosses overnight. NZD/EUR is trading at 0.5760 currently, after reaching a high of 0.5780 overnight. Further weakness in the GBP overnight saw NZD/GBP jump from 0.5060 to 0.5090 currently. NZD/JPY marched from around 63.60 to 64.20 currently.

NZD/AUD has spent the evening flirting with the 0.7950 level. The major event for the cross today will be RBA Governor Steven’s testimony. We think Steven’s is unlikely to validate current aggressive market pricing for cuts. He will surely note increased economic uncertainty, but conclude it’s too early to make judgments about what, if anything, it may mean for RBA policy ahead.

The OIS market has a 50% chance of a 25bps cut at the September 6 policy meeting and a total of 133bps of cuts over the next 12 months. Therefore, we think the risks are skewed towards an increase in short-term interest rates following Steven’s testimony.

An increase in Australian rates would likely see the NZ-AU interest rate differential move in favour of the AUD. We would view any dips in NZD/AUD below 0.7850 as a good opportunity to buy the cross.

Looking to the day ahead, the focus will initially be on RBA Stevens speech at 11.30am NZT. We expect NZD/USD to remain in a 0.8200 to.8330 range until Bernanke’s speech early Saturday morning.

Majors

FX markets remain largely range bound ahead of a key speech from US Federal Reserve Chairman Bernanke. Overall, the USD index rose from 0.7400 to 74.30 as markets tempered expectations that Bernanke will deliver a strong hint QE3 tomorrow morning.

The realisation by the market that Bernanke is unlikely to announce further monetary stimulus has hurt risk sentiment overnight. The S&P500 index dropped 1.6% and the Euro Stoxx 50 index fell 1.0%. The VIX index (proxy for risk aversion) jumped back to 38.60, from 36.0 yesterday. The CRB index (broad index of global commodities) remained better supported overnight, ending the session broadly unchanged.  

EUR/USD was hit overnight by a rising USD and more shenanigans in the ongoing European debt crisis. EUR/USD plunged from 1.4420 to 1.4330 after rumours circulated Germany, France and Italy may follow other European nations and enact a short-selling ban on equities. While the Germans denied the rumour, the French and Italians did implement a short-selling ban overnight. EUR/USD is currently trading at 1.4380.

The JPY was the worst performing currency against the resurgent USD over the past 24 hours, surging from 77.00 to 77.60 currently. As we have noted in recent days, a sustained strengthening in the USD and stabilisation of global risk sentiment will be needed to see the JPY weaken significantly.

Behind the JPY, the GBP was the weakest performing currency over the past 24 hours. GBP/USD shed around a cent to be currently trading at 1.6280 currently. UK data overnight had little impact on the currency. CBI retail survey for August fell to -14 (-10 expected), highlighting the fragility of UK growth. In this regard, the release of UK Q2 GDP will be closely watched. The market is expecting 0.2% for the quarter.

Comments from Bank of England member Weale helped to reinforce the negative mood towards the GBP. Weale noted the BoE would take measures (i.e. further asset purchases) to support consumption should growth weaken further.

While Bernanke is not expected to announce QE3, we do expect him to pledge the Fed’s readiness to act if US growth weakens further. Looking beyond any knee-jerk reactions in risk sentiment, such a pledge may help riskier currencies such as the NZD and AUD.

Looking to the night ahead, expect the focus to remain on what policy options US Federal Reserve Chairman Bernanke will discuss in his speech at 2am Saturday morning NZT. Following Bernanke, we have a speech from ECB President Trichet. Data wise, we have the release of UK and US Q2 GDP, and the US University of Michigan consumer confidence survey. 
 

See our interactive swap rates charts here and bond rate charts here.

Kymberly Martin and Mike Burrowes are part of the BNZ research team. 

All its research is available here.