by Raiko Shareef
NZ Dollar
The NZD was the standout performer amongst the majors overnight, rising 0.7% against the USD, to 0.8730.
Part of this is due to wider USD weakness following a woeful second-estimate of US Q1 GDP. But the NZD was on the rise before that result, and continued to rise afterward, where other majors saw their gains pared.
There doesn’t seem to have been any news or data that sparked this outperformance. We suspect that that NZD bulls were looking for a breach of 0.8700 once again, and got lucky with the US data.
Today’s local LVR data will be of little interest to the NZD. For the moment, 0.8750 looks like the level to beat, having held on Tuesday, ahead of the more serious resistance at 0.8780. The 0.8670-8680 region continues to provide decent support, and looks unlikely to be challenge in the Asian session at least.
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Majors
The second estimate for US Q1 GDP came in at a -2.9% annualised rate, a much sharper fall from the original -1.0% than had been anticipated (the consensus pick was for -1.8%). This was the worst quarterly reading since Q1 2009, but much of the weakness can be attributed to the extreme weather early in the year. Most analysts expect a strong rebound in Q2, which should show growth at +3.5%, before averaging at +3.1% for the second half of 2014, according to a Bloomberg survey.
But on the day, the headlines certainly looked bleak. Compounding the USD’s woes was softer durable goods data. Exclude the volatile transportation component, durable goods orders fell by 0.1% m/m in May, against expectation of a 0.3% gain. One bright spot within US data overnight was that capital goods orders non-defense ex air (i.e. business investment) rose faster than expected at 0.7% m/m.
The USD gapped lower by about 0.3% against the majors, but has pared back some of that loss. The dip took the US Dollar Index through its 200-day moving average, and it looks likely to close below that for the first time since late May. With US bond yields drifting lower and the Fed seemingly reluctant to talk a hawkish game, the current softness in USD is understandable.
That said, we retain a constructive view on the USD, banking on a US recovery that forces the Fed’s hand, especially on the inflation front. Tonight’s main event will be an update to the Feds’ preferred inflation measure. Core PCE deflator is picked to rise to 1.6% y/y in May, from 1.4% previously, well on its way to the 2.0% target. We expect this to spark further debate on whether the Fed is perhaps being too complacent on inflation, which would be USD supportive.
Other news:
*US Markit Services PMI 61.2 vs 58.0 exp.
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