NEWS / Foreign Exchange

Weak US confidence data sees USD fall slightly

New Zealand dollar

NZD a victim of carry trade unwinding. The NZD opened around 0.7680 and initially pushed higher in an attempt to recover some of the ground it gave up the previous night. This saw the currency back through 0.7700 by midday however the move lacked real conviction and by the end of the day the NZD was roughly back where it had opened. Adding to the bearish tone was a Wall St Journal article which indicated that a rate cut by the FOMC later this week is not a sure thing. Given that the market is pricing in greater than a 100% probability of a 25bps cut this sent some jitters through the market. Overnight the NZD experienced some fairly whippy price action as it dipped to 0.7640 on more carry trade unwinding then bounced right back to 0.7700 before taking another tumble. It opens this morning around 0.7660.

Australian dollar

AUD uptrend still intact despite sell-off. The AUD had a similar day to the NZD ??“ initially strengthening to an intra-day high of 0.9238 then retreating all afternoon as carry trade positions were unwound. A drop in regional equity markets contributed to the sustained slide. This theme continued overnight until a base of 0.9145 was found before buying interest re-emerged.

Major currencies

Weak US confidence data sees USD fall slightly. Expectations of an interest rate cut by the Federal Reserve were further reinforced last night when data released showed the US consumer confidence index hit its lowest level in two years. The index fell to 95.6 against expectations of around 99.0 and saw the USD continue its recent gradual weakening trend. The dollar had recovered earlier in the day after a Wall Street Journal report cast some doubt about a US rate cut this week, one of a number of similar articles that have been released over the last few days.

Economic data and events

US consumer confidence down 3.9 pts to 95.6 in Oct. The Conference Board index posted its third consecutive fall, taking the index level to its lowest since late 2004 (except for the temporary two month drop to below 90 in the immediate aftermath of hurricane Katrina). In July, this index was at a seven year high, so it is clear that recent events in the housing market and banking sector have impacted materially on how consumers assess their finances, the labour market and the state of the economy.
US S&P/CS house price measure showed further weakness, with the 0.7% monthly decline in August ??“ the month the credit crunch really bit ??“ the steepest since this index turned negative a year ago. With prices now down 4.4% yr in annual terms (and consumer confidence faltering), concern that housing contagion will spread to consumer spending is sure to intensify. On that point, the weekly retail reports for the third retail week of October were weak. The Redbook retail average slipped from ??“0.2% to ??“0.3% and chain store sales only managed a lacklustre 0.1% gain after plunging 1.5% in the prior week.
Japan's headline labour market softened in September. The unemployment rate jumped from 3.8% to 4.0% and the jobs-to-applicants ratio fell from 1.06 to 1.05. The participation rate was steady at 60.6%, where it has been since July.
Japanese real household spending rose 3.2% in September. This was better than expected but it is not enough to pull Q3 out of a deepish hole. Spending declined 0.6% from Q2 and is up just 1.5%yr. This indicates that PCE will be no better than steady in the national accounts.
Euroland retail PMI down 2.6 pts to 47.9 in Oct, falling back into negative territory (<50) for the first month since July. Yet another sign, then, that the Euroland economy is in the process of losing some momentum. That said, unemployment continues to fall away in Germany, by 40k this month, enough to see the unemployment rate ease a tick to 8.8%. So while the forward looking indicators of the German and Euroland economies are mostly slowing, the labour market is still benefiting from the recent robust pace of economic growth.
The Swedish Riksbank lifted its key rate 25bp from 3.75% to 4.0%. The statement noted good growth, rising jobs, increased inflation and inflation expectations, but acknowledged also that growth would be impacted by a weaker US economy and recent financial market unease.
Canadian industrial product prices fell 0.9% in Sep, down for the fifth month running, as C$ strength continued to offset price gains in some sectors, such as energy.