Core US inflation higher than expected, as were US durable goods orders. Both will impress the Fed. NZ data positive too

By Raiko Shareef

Some pretty spectacular moves in currency markets overnight has the USD sharply higher.

The most eye-opening was the collapse in EUR by nearly 200pts.

This move may have been assisted (but was certainly not driven) by better-than-expected US inflation data.  

In fact, there was little reason for the crack lower, even if the US CPI result did provide a little rhyme. EUR’s tumble began well before that data saw the light of day. Even if we’d know the results beforehand, we would not have picked it to have such an impact.

The market looks to have simply choked on some chunky selling, and the reduced appetite within the industry to hold risk has exacerbated the move.

As a result, the Bloomberg Dollar Spot Index is up 0.9%, a significant daily move that has recovered all of its losses since Fed Chair Yellen’s testimony mid-week. EUR’s leadership dragged the usual European suspects lower, too. Every G10 currency is weaker against the USD.

On the data itself, we understand that news media might work itself into a lather about the fact that headline inflation slipped below 0% on an annual basis for the first time since 2009. But that was almost entirely driven by the 18.7% m/m fall in gas prices. Core inflation surprised on the upside, which will be heartening for a Fed looking to raise rates.

US durable goods orders were also stronger than expected, but that was tempered by downward revisions to previous data. Additionally, the business investment indicators were softer than expected. As a whole, not a set of data to spark huge interest in the USD.

NZD sits atop the G10 leader-board, supported by a solid set of local data released yesterday.

Firstly, Fonterra maintained its payout forecast at $4.70kg/MS. Two months ago, a downgrade looked near inevitable.

Secondly, both the trade balance and net migration punched in higher than expected. These add to the recent beat of positive domestic data.

Early in the session, when the USD was still on the back foot, these results helped NZD/USD push above 0.7600. It even briefly traded through the critical 0.7610 level. That level remains key. By the time we walked in the door this morning, it was back at 0.7550, else we would have entered the short position near 0.7600 that we’ve long discussed. Even with NZD’s outperformance of late, we still think that USD strength over coming months will see us heading back toward 0.70.

Today, there’s plenty on the calendar, but the key really will be the second reading of US Q4 GDP, which is expected to be revised lower from 2.6% annualised to 2.0%. The USD rally overnight needs affirmation. If the data disappoints materially, the reversal could well be painful.

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