NEWS / Foreign Exchange

USD drifts, tone remains bearish

New Zealand dollar

NZD hits two week high. The NZD opened strongly ??“ taking its cue from a positive finish to global equity markets on Friday which provided further impetus for the carry trade. Adding weight to the move higher was a slightly better than expected trade deficit number and a rampant Aussie dollar. This saw NZD test 0.7700 for the first time in 2 weeks before pulling back slightly to spend the rest of the day trading a 10 point range. Overnight the NZD broke out of its shackles to post a fresh high of 0.7740 with good demand seen from the offshore community. The rally was halted at this point and the NZD fell to 0.7665 in sympathy with the AUD which was sold heavily.

Australian dollar

Brakes applied to AUD rally. The AUD opened just short of 0.9200 but it didn??™t take long before the currency pair cleared this level to post an intra-day and multi-decade high of 0.9234 spurred on by bullish sentiment and the local stock market which climbed to an all time high. Overnight the rally continued to a new high of 0.9272 before the brakes were applied as a number of investment houses started unloading the currency ??“ partly on profit taking but seen more as a corrective move lower given the sharpness of gains towards 0.9300. This saw the AUD retreat below 0.9200 before the buying interest re-emerged.

Major currencies

USD drifts, tone remains bearish. It was a quiet day for the USD yesterday with no economic data to drive the currency. Bearish sentiment ensured another record low against the euro, as the markets now appear certain the Federal Reserve will cut interest rates later this week. The USD index, the DXY, also fell to its lowest level in its near 30 year history. In other records gold rose above US$794 an ounce, its highest level in 28 years while oil is now trading above US$93 a barrel. Elsewhere, the Canadian dollar also continued to strengthen trading a 47 year high.

Economic data and events

No US data overnight.

Japanese September retail sales unchanged from August at 0.5%yr. The in-month decline of 2.0% was roughly on expectations. Our view is that consumption will be constrained by extremely modest income growth. Incomes themselves await a tipping point where labour reward becomes a competitive strategy among Japanese firms as shortages become more acute. We are at least twelve months away on that count.

German CPI 2.4% yr in Oct. This was unchanged from September.

UK household credit stronger than expected in Sep. The value of net new consumer credit rose from ??1.1 to ??1.4bn (strongest since early last year), while net mortgage lending jumped from ??8.5bn to ??9.8bn (the highest in seven months). However the number of new mortgage loans fell from108k to 102k. It is somewhat suspicious that this kind of lending strength should be seen at the height of the credit crunch and in the same month as a big mortgage lender almost went under, but as the data stand, they make a stronger case for the Bank of England to leave interest rates on hold for the time being.