NEWS / Foreign Exchange

USD falls on weak growth data

NZD slips but gets up again

The NZD opened weaker on Friday and spent all of local trading sub 0.7400. However there was still demand for the currency and a weaker USD overnight helped NZD/USD regain the 0.7400 handle and rally to an intraday high of 0.7448. The range trade theme continued for the NZD against the USD and AUD with the currencies trading 0.7410 to 0.7448 and 0.8910 to 0.8960 ranges respectively during offshore trading.

AUD choppy in seesaw trading

The AUD came under some slight selling pressure on Friday, partly as the result of softer metals prices. Traders were generally hesitant about pushing the currency in either direction ahead of Friday nights US economic growth data, and the AUD ended the day trading a narrow 16 point range. It was a different story overnight however, with broadbased USD weakness seeing the AUD trade a 100-point range as it burst above 0.8300, reaching a high near 0.8340. Some early USD strength this morning has seen the currency open a little lower, just short of 0.8300.

USD falls on weak growth data

After remaining confined to narrow range trading on Friday, the USD fell overnight in the wake of weaker-than-expected US economic growth data. With the market expecting Q1 data to print around 2.2%, the actual figure was released at 1.3%, sending the euro up to a record high around 1.3680 against the USD. The data and subsequent move have further enhanced investor??™s views that the Federal Reserve will have to cut interest rates at lease once at some stage this year.

Japanese data: Bank of Japan on hold at 0.50%. Mar unemployment rate remains at 4.0%. March nationwide headline rate improved to -0.1%yr, from -0.2% in Feb. The March core (ex fresh food) fell to -0.3%yr from -0.1%. The Tokyo series for April improved to +0.2%yr from an upwardly revised +0.1%yr (prelim flat). Tokyo core (ex fresh food) was flat versus a -0.1%yr read in March. March retail sales fell 0.7%yr and household spending rose 0.1%yr. Industrial production fell 0.7% in March, +1.6%yr. Annualised housing starts came in at 1.304mn in March.

US Q1 GDP growth disappoints at 1.3% annualised. Q1 saw the slowest quarterly pace for four years, well short of our 2.2% forecast. But the detail in the report was not unfavourable. Consumer spending growth held close to 4% despite renewed rises in gasoline prices dampening spending power and poor weather making shopping difficult. The drag on growth from housing investment was steep, but not quite as much as in the prior two quarters. Business investment actually picked up, both in structures and plant & equipment (spending on new Microsoft software was supportive here). The contribution from government spending in Q1 was less than typical, just 0.2 ppts compared to a quarterly average of 0.5 ppts in 2006. Together, the sum of government, business and household spending grew 2.0% in Q1, a touch stronger than Q4??™s 1.9% growth.

US inflationary pressure? The deflators in the report were suggestive of continued price pressure. The overall GDP deflator of 4.0% was the highest since 1991, and the core PCE deflator corrected back to 2.2% after temporarily dipping below 2% in Q4. Also the employment cost index was constrained to a 0.8% gain in Q1 by a surprisingly low 0.1% rise in benefits costs, but the wages & salaries component rose at its fastest pace for some years.

US April consumer sentiment revised higher to 87.1 from 85.3.

German retail PMI posted a further sharp rise in April, and that in turn fed into a stronger Euroland retail PMI. This provides strong grounds to expect that the official German (and Euroland) retail sales data for March and April will show a strong recovery after two months of softness following the German VAT hike in January.

German inflation was unchanged at 1.9% yr in April, against expectations of a modest decline. Also the Euroland current account balance swung back into deficit in Feb, for the first time in six months, at -?‚¬5.3bn. Recall that trade was also in deficit that month.