NEWS / Foreign Exchange

USD weakens against yen as US home sales slump

New Zealand dollar

Choppy day for NZD ahead of RBNZ announcement. The NZD traded a fairly tight range in the early stages of yesterday??™s local session before rallying to an intra-day high of 0.7603 on the coat-tails of our Aussie counterpart, buoyed by strong inflation data. Any gains were short-lived however with the NZD struggling for the remainder of the session as market participants steadily sold both NZD/AUD and NZD/JPY crosses. This tone continued overnight with a bout of risk aversion seeing the NZD offered down to its intra-day low of 0.7468. We open this morning around 0.7495 with the market looking for direction from the Reserve Bank??™s interest rate announcement, in particular Dr Bollard??™s accompanying statement.

Australian dollar

Strong CPI struggles to counter risk aversion. The AUD jostled for position ahead of yesterday??™s data before surging to an intra-day high of 0.9049 on the back of a strong core CPI print of 0.9% for Q3, better than the expectations of 0.8% and resulting in the market now pricing in an 88% chance of another interest rate hike on November 7. Overnight the news wasn??™t as positive with the AUD being sold down to its intra-day low of 0.8937 as risk aversion resurfaced on the back of a New York Times Report suggesting significant bond losses by another large US brokerage.

Major currencies

USD weakens against yen as US home sales slump. The USD weakened against the yen in overnight trade as US stock markets deteriorated. US investment bank Merrill Lynch reported its first loss in six years, writing down $7.9bn of losses on mortgage related securities, with leading ratings agency S&P to cut the bank??™s rating from A+ to AA-. While the market braces itself for further US bank write-offs, the National Association of Realtors reported an 8.0% slump in existing home sales, fuelling speculation that the Federal Reserve will cut interest rates at next week??™s FOMC. JPY slipped from a high of 114.96 to touch a low of 113.81, before recovering to 114.20. The euro ranged between 1.4188 and 1.4268 and opens this morning at 1.4260, while Sterling backed away from an intra-day high of 2.0517.

Economic data and events

US existing home sales plunge 8% in Sep. Existing home sales fell a little more than the 7% we expected, but the 8% decline was still broadly consistent with the weakness already shown in the NAR??™s recent pending home sales reports. Sales were down steeply across all regions. In percentage terms the 8% drop was the biggest of the housing downcycle so far. It is clear that housing market weakness was exacerbated in the months that the credit crunch took hold. And given that the September existing sales data reflect completed sales agreed in July-August, we probably haven??™t seen the end of the downswing yet.

US median house prices down 4.2% yr in Sep. The other news in the report was that median house prices fell quite sharply in September, from $224.4k to $211.7k. This time last year prices eased from $224.0k to $221.0k. These figures aren??™t seasonally adjusted but they show that in annual terms price stagnation has given way to price decline. That is consistent with the message from the respected but more dated S&P/CS house price data, and increases the risk that housing market weakness might impact more seriously on household confidence and spending.

Japanese seasonally adjusted trade surplus was ??1034bn in Sep. That compares to ??1133bn in Aug. The unadjusted surplus widened sharply to ??1638bn from ??735bn. Exports and imports values both fell in the month, reflecting a combination of yen strength and patchier domestic demand.

Euroland factory PMI down but services up in Oct. The advance PMI results for October showed a steeper than expected fourth consecutive decline in Euroland factory sector growth (probably a function of euro appreciation and energy prices), but a bigger than expected (though still partial) rebound in services (as the credit crunch eased somewhat). Consequently there was a modest decline from 54.7 to 54.5 in the composite index, which hit a two year low this month ??“ further evidence that the Euroland economy is unlikely to bounce back much from Q2??™s sluggish 0.3% quarterly growth pace. Also, the Euroland current account recorded its fourth consecutive surplus in August, confirming that a full year surplus is now likely in 2007, after 2006??™s slippage into deficit.