Yellen's inequality speech provides little guidance for markets; locally, eyes will be on Q3 CPI this week

By Kymberly Martin

NZ Dollar

The NZD/USD ended the week a little lower, at 0.7920, following a reasonably contained range on Friday night.

Friday looked to be a quiet end to the week for the NZD with no domestic data scheduled for release. This was briefly curtailed Friday morning by the RBNZ’s accidental re-release of its earlier statement that the NZD is “unjustified and unsustainable”. As it hit news wires the NZD/USD briefly plunged, before the error was acknowledged. The NZD/USD then returned to its previous level, before drifting slightly lower on Friday night as the USD strengthened. It ended the week around 0.7920.

The RBNZ also announced on Friday that it was moving from tracking a narrow NZ TWI 5, to a broader (and more representative) NZ TWI 17. The shift will have little direct impact on the NZD. But it may have implications for future OCR settings, dependent on the relative signal the broader TWI measure sends about overall monetary conditions.

On the crosses, moves were relatively contained on Friday night, although the NZD underperformed against the GBP. The NZD/GBP ended the week at 0.4920.

A relatively busy NZ data agenda kicks off today, with the release of the NZ Performance of Services Index and the ANZ-RM Consumer Confidence Index. The confidence index will draw interest as the first full reading post the September General Election.

But for the main event of the week the market will no doubt be looking to Thursday’s Q3 CPI reading. We expect a pullback to 1.2% (with downside risk), from 1.6% in the previous quarter. The NZD may well respond to this print, taking it as the start of a declining inflation trend. That would be a misinterpretation in our view, as we see a rising inflationary trend through year-end and 2015.

Ahead of this reading we eye familiar support and resistance levels for the NZD/USD, at 0.7850 and 0.8000 respectively.

----------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

----------------------------------------------------------

Majors

The USD was broadly stronger against its peers on Friday night. The JPY was the worst performer while the GBP held its ground.

Some relative calm returned to markets on Friday evening. US data calmed some jangled nerves. US September housing starts came in at 6.3%m/m (5.4% expected) while the October reading for the University of Michigan Confidence rose to 84.6 (84.0 expected).

The Q3 S&P500 reporting season also continues to unfold. With around 80/500 companies now reported, earnings have positive earnings surprise sits at 5.4%. Equities on both sides of the Atlantic enjoyed strong rebounds, with the Euro Stoxx 50 closing up 3% and the S&P500 up 1.3%. The USD index moved off intra-night lows of 84.80 to end the week at 85.20.

Markets also focused on ECB ‘official speak’ as US Fed Chair, Yellen, provided little for markets in her prepared speech on inequality. ECB economist Coeure confirmed the ECB would begin asset purchases within days. Meanwhile ECB’s Weidmann criticised the decision to undertake asset purchases. He said low inflation was outside the control of monetary policy and further structural overhauls are needed in Eurozone to lift growth. The EUR/USD declined to end the week at 1.2760.

The JPY was Friday’s worst performer as the improvement in general risk sentiment undermined the ‘safe haven’ bid for the currency. The USD/JPY traded up from 106.20, to end the week at 106.90.

It looks to be a relatively quiet easing into the offshore data calendar this week. Tonight, UK house prices, German PPI and the Eurozone’s current account data will be released. Closer to home, RBA’s Kent is scheduled to speak in Adelaide today, in an otherwise clear AU data agenda.

All its research is available here.