NEWS / Foreign Exchange

USD sets new record against euro ??¦ again

New Zealand dollar

NZD follows its Aussie neighbour higher. Further USD weakness and renewed demand for carry trades has the seen the NZD steadily recover from the dip seen at the end of the previous week after the Dow Jones Index dropped over 300 points. Having opened around 0.7590 the currency steadily ground higher throughout the day to post a 10 day high of 0.7647 before pulling back a touch in late afternoon trade. Overnight saw a fresh high of 0.7675 but also a weaker NZD/AUD as AUD outperformed with all expecting the RBA to close the interest rate differential with the RBNZ in the short to mid-term.

Australian dollar

AUD forges ahead to post 23?? year high. AUD opened on Friday around the 0.9090 level and after tracking sideways for a short while, quickly moved through 0.9100 and never looked back. The bullish sentiment for the AUD stems from an increased chance of a rate hike on November 7 (market is now pricing in a 98% chance of a hike), an increase in commodity prices (especially gold) and further weakness in the USD. Overnight the upward trend continued as AUD cleared technical resistance around 0.9155 to post a 23?? year high of 0.9187 and now looks set to test 0.9200.

Major currencies

USD sets new record against euro ??¦ again. Continued focus on expectations of interest rate cuts and another surge in the price of oil saw the USD under further pressure on Friday night as the currency again fell to new all time lows against the euro. Although a cut of 0.25% has been heavily priced in on the back of a recent string of poor economic data and sub-prime woes, markets are now suggesting a further cut of 0.25% will be required by the Federal Reserve. However investors were hesitant to add to positions and push the euro through 1.4400 ahead of this Wednesday??™s (Thursday morning, NZT) Federal Reserve interest rate decision. Elsewhere, and adding to the euro??™s strength, were comments by Eurogroup??™s chairman Jean-Claude Juncker that the European currency had not yet reached levels that might cause alarm.

Economic data and events

US Uni of Michigan consumer sentiment revised down 1.1 pts to 80.9 in Oct. Consumer sentiment was revised lower, with the preliminary rise in the current measure revised to a slight fall, and the outlook index??™s decline now a little steeper. The final October reading is the lowest since May 2006. However inflation expectations were revised higher.
Japanese consumer prices on expectations. The Sep nationwide headline measure came in at -0.2%yr, ex food at -0.1%yr and ex food and energy -0.3%yr. The equivalent series for Tokyo in Oct were +0.1%yr, flat and -0.3%.
Japanese Sep industrial production adjusted for Aug spike. The headline fall of 1.4% is a reaction to the unusual volatility in July/Aug. Transport and tech, the two industries most responsible for the recent noise were so again. The annual pace of 0.8% understates the vitality of the sector.
German GfK consumer confidence 4.9 in Nov. This index has eased for three months running now. The latest decline was driven by a steep fall in ???willingness to buy???, and less slippage in the ???economic outlook??? and ???income expectations??? components. Note that the Nov result was actually surveyed in the first two weeks of Oct.
German inflation update. With more regional inflation results for October coming in, it seems that Saxony??™s higher result last week was not in fact setting the tone for the rest of Germany. Friday??™s figures showed inflation steady or lower. Other state figures and the national data are due by Monday.
Euroland M3 growth eased to 11.3%yr in Sep, from its July peak of 11.7% yr. The ECB has acknowledged that M3 has been receiving a boost from the liquidation of riskier investments (outside M3) into cash (inside the M3 definition). Nevertheless double digit growth remains excessive and reminds us that there are upside inflation risks to consider over the medium to longer term. That said, there has been enough survey evidence of softer growth prospects in the near term for us to now formally drop the ECB rate rise we had in our forecasts for Dec. We now see the ECB on hold at 4.0% well into 2008.
Canadian quarterly business conditions survey of manufacturing showed the orders measure slipping from 6 in July to ??“3 in Oct. That is the first negative reading on this quarterly survey for this year, unsurprising given the rapid appreciation of the CAD over the past few months, and concerns about the US economy.