NEWS / Foreign Exchange

Risk appetite increases, USD weakens

New Zealand dollar

Risk appetite up as equities rebound. The NZD ground steadily higher during yesterday??™s local session, up round a cent as a rebound by global equities increased the markets hunger for riskier assets. Overnight the theme largely continued, the NZD grinding up to an intra-day high of 0.7574 before settling circa 0.7555 at session close. The market now looks ahead to tomorrow??™s Reserve Bank announcement and the accompanying statement for further short-term direction.

Australian dollar

AUD on the move ahead of CPI data. The AUD rebounded off a recent three week low yesterday, breaking through 89c on the back of the markets renewed risk appetite and expectations of strong inflation data on Wednesday. Overnight the run back to 90c continued, buoyed by another positive day for global equities which saw the carry trade return to the fore. Attention now turns to today??™s inflation data for further direction with a strong print likely to bolster the case for further interest rate hikes.

Major currencies

Risk appetite increases, USD weakens. The equity markets recovered slightly on Tuesday indicating market participants??™ increased appetite for risk. This brief return to risk managed to spill through to the FX market and the US dollar and Japanese yen were punished as a result. The Sterling managed to regain all the previous day??™s losses, rallying from 2.0310 to 2.0505 where we open this morning. The euro rebounded from Monday??™s poor showing and recovered to 1.4260 from 1.4175 earlier in the day. As is normally the case when risk appetite increases the yen struggled, USD/JPY rallied from 114.20 to temporarily trade 115.05 before closing at 114.95.

Economic data and events

US Richmond Fed index falls from 14 to ??“5 in Oct, although it held above the ??“10/??“11 readings it was posting in the first five months of this year. It is interesting that the other regional Fed indices from Philly and New York also recently corrected downwards from mid-year peaks, though their dips (which took place a few months ahead of Richmond??™s) proved to be temporary. Partial offset to the apparent softening in factory activity in the Richmond district was a stronger services reading, though the retail measure extended recent softness.

US weekly retail reports were very soft. Chain store sales plunged 1.5%, their steepest decline in four months; the Redbook retail average slipped from 0.1% to ??“0.2% (second retail week of October).

Canadian retail sales up 0.7% in Aug, boosted by the known jump in auto sales. Ex auto sales growth of 0.3% was constrained by falling gasoline prices, so the underlying story was actually quite up-beat (up 1.0% ex autos & gas). This is consistent with the view that the domestic Canadian economy is still in good shape, though Canadian dollar strength and concerns about the US economy are impacting confidence and activity in the external sector.

Euroland orders and retail data soft. August??™s modest 0.3% bounce in Euroland orders after July??™s steep fall was consistent with the recent pattern in the already published German data, up 1.4% after declining nearly 7% in July. But with Italian and French orders posting August declines, the Euroland orders bounce was muted. The Euroland household sector seems to be losing some momentum, with French consumer spending growth slowing and Italian retailing remaining lacklustre.

UK CBI factory survey falls 12 pts to ??“6 in Oct, following a more up-beat third quarter. While it may be tempting to blame the credit crunch, note that the orders, exports and output prices readings only fell back to what they showed in July, ahead of the recent turmoil. This could be data noise, though as the data stand, they do suggest a less robust start to economic growth in the fourth quarter.