NEWS / Foreign Exchange

Hawkish comments see AUD move higher

Bullish tone supports NZD

The NZD held firm on Friday with dips again being well supported as a number of factors combined to hold the currency within it recent trading range. The NZD found initial support on the release of Feb REINZ housing data which showed the average house price rose to $335k from $327k in Jan, data which will not please the RBNZ. The currency then saw some buying linked to euro strength, with demand relating to yield differential also helping the NZD. The momentum continued into the overnight session as the NZD followed the AUD higher, with the currency briefly trading above 0.7000 before succumbing to NZD/JPY selling pressure.

Hawkish comments see AUD move higher

The AUD also found some support on Friday, initially on the back of a firmer euro and subsequently on hawkish comments from RBA Assistant Governor Edey. Speaking to the Australia and Japan Economic Outlook Conference, Edey warned that recent strength in demand, output and wages could push up underlying inflation. This immediately shifted the markets??™ focus to interest rates, with the likelihood of a May hike now around 50%. The currency held its ground overnight and opens this week around 0.7940.

Sub-prime mortgage concerns push USD to 3 month low

Continued concerns surrounding the US sub-prime mortgage market weighed on the USD on Friday. Fears that the growing crisis could spread, negatively impacting growth, were exacerbated by comments from former Fed Chairman Alan Greenspan, pushing the USD to three month lows against a basket of currencies. USD/JPY fell from a 117.59 high to touch a low of 116.31, while the euro strengthened to its highest level since Dec 8, touching an intraday high of 1.3340. Sterling also rallied, posting a high of 1.9505. The USD pared losses in late trade, with mixed data on CPI and industrial production thought unlikely to impact the outcome of this week??™s FOMC meeting.

Japan's tertiary activity index rose 1.6% in Jan. That leaves the annual rate at 1.3%, where it has been for the two previous reads. Major contributions to the gain came from retailing (+2.5%), finance (+1.9%), wholesaling (+1.0%) and business services (+0.7%). This is a good start to Q1 for the services sector.

US consumer sentiment falls to 6 month low in March. The preliminary read on consumer sentiment from the Uni of Michigan was for a fall from 91.3 to 88.8, similar to that recorded by the IBDTIPP sentiment measure earlier in the week. The UoM decline was weighted more towards its current measure although the outlook index fell too. Falling equity markets, recession talk, worries about house prices and rising gasoline prices would all have been contributing factors.

US industrial production up 1.0% in Feb. IP posted its strongest one month gain since November 2005 last month, though the breakdown shows a further sharp increase in utility output (driven by the cold weather) was the main driving factor. Manufacturing was less impressive, with half of its 0.4% gain attributed to a partial rebound in auto production that probably won??™t be sustained. Still, the result shows that the moderately decent ISM manufacturing report for February was the best guide to the factory picture for that month, compared to the slumping Richmond Fed survey, flat Philly Fed and outrageously strong NY Fed.

US CPI core 0.2% in Feb. The outcome was exactly in line with our 0.4% headline, 0.2% core forecast, but because we now get an accurate 3 decimal point read on the monthly data we know that the February core rate was only a whisker below January??™s near 0.3% result. The three month annualised pace of core inflation has picked up quite smartly so far this year, from 1.2% in Q4 to 2.6% in the latest three months. Were it not for all the panic about the US economy sliding into recession because of the sub-prime mortgage market imploding, the last couple of days??™ inflation news would have seen the market moving to price in Fed rate rises!