By Danica Hampton
It feels a bit like ground-hog day. Once again, NZD/USD spent most of the past 24 hours between 0.7380-0.7450.
In yesterday's semi-annual Financial Stability Report, the RBNZ acknowledged the improvement in NZ's economic outlook but warned about ongoing issues and risks. A key risk is how the world, and NZ, will cope with the unwinding of its massive policy stimulus. It also noted the recent strength in the NZD and its potential to hinder further improvement in NZ's external balances.
Yesterday's Chinese data was a little mixed (both industrial production and retail sales beat expectations, but growth in exports and imports were a touch weaker than expected). As such, it didn't really provide much in the way of fresh impetus for growth sensitive currencies like the NZD.
Overnight, US bond markets were closed for Veteran's Day. But equity and currency markets kept trundling along. GBP/USD took centre stage, plunging from nearly 1.6800 to around 1.6650 after the Bank of England's Inflation Report. The combination of benign inflation forecasts and comments from Governor King convinced markets that UK rate hikes were unlikely any time soon. The nose-dive in GBP/USD paved the way for generalised USD strength. As such, despite the modest gains in commodity and equity prices, NZD/USD sank below 0.7400.
Today we'll get an update on the NZ retail sector. We're looking for nominal monthly sales to rise 0.4%m/m in September (and +0.1% excluding the volatile automotive component). While anecdote suggests there's been a lot of discounting over the past quarter in retail stores, some of the retail components of Q3 CPI showed remarkable strength. As such, it's been harder than usual to assess what likely happened to retail sales volumes in Q3. All up, our economists are looking for retail sales volumes to drop 0.6%q/q.
Across the Tasman, keep an eye out for October's employment report. The market is looking for employment to drop 10,000 and the unemployment rate to edge up to 5.8%.
For today, we suspect dips in NZD/USD to be limited to 0.7350. Headwinds are seen ahead of 0.7450.
The USD did the side-step against most of the major currencies against last night.
Once again, GBP stole the limelight. After flirting with 1.6800 early in the night, the currency plunged to around 1.6650 following the UK Inflation Report. Despite last week's increase to its quantitative easing (QE) program, the Bank of England still expects inflation to remain below target in two years time. This implies that market expectations for rate hikes next year are too aggressive and it's premature to conclude QE is over.
Governor King also said a weaker GBP would help rebalance the economy and that UK growth was unlikely to return to pre-crisis levels for "a considerable period".
Yesterday's Chinese data was a bit mixed, but still consistent with the global economic recovery remaining on track. October's retail sales rose 16.2%y/y, well above 15.7% forecasts. Industrial production also performed strongly, rising 16.1% vs. 15.5% forecast. However, both exports (-13.8%y/y vs. forecasts of -13.0%) and imports (-6.4%y/y vs. -1.0% forecast) disappointed. New loan growth was also sluggish in October, rising just US$253b vs. US$370b forecast.
After the data, China sent a clear signal that it may be ready to allow the CNY to appreciate. In its Q3 monetary policy report, the PBOC departed from the familiar language of keeping the CNY "basically stable at a reasonable and balanced level". Instead, the PBOC said "Following the principles of initiative, controllability and gradualism, with reference to international capital flows and changes in major currencies, we will improve the yuan exchange rate formation mechanism".
Both global equities and commodity prices rose modestly last night. The DAX rose nearly 1%, the FTSE rose 0.7% and the S&P500 is currently up 0.4%. The CRB index (a broad measure of commodity prices) is up about 0.5%.
Despite the modest gains in equities and commodities, the USD stayed relatively firm. USD sentiment may have been helped by comments from US Treasury Secretary Geithner who said it's important to the economic health of the US to "maintain a strong dollar". Geithner also said the US was determined brings its "fiscal position back to a sustainable balance".
In general, it seems growing confidence in the global recovery, combined with last week's Fed commitment to keep rates lows for "an extended period", has set the scene for the USD to remain heavy this week. The USD Index slipped to a fresh 15-month low of 74.77 last night, before the downward momentum stalled. Expect near-term bounces to be limited to the 76.50 region.
* Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.
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