New Zealand dollar

NZD volatility continues. The NZD suffered from further risk aversion and weak equity markets on Thursday to slip from 0.7830 down to 0.7667 before recovering late in the day, only to lose ground on the close. Q3 employment data was released revealing a weaker-than-expected result, however the details were not as poor as the headline number. This added momentum to the falling NZD, triggering stop loss sell orders and pushing the currency to the lows. The currency managed to recover as the US stock market opened in positive territory; the high traded overnight was 0.7784 before slipping in line with another bout of equity weakness. We open this morning circa 0.7740.

Australian dollar

AUD mimics equity market price action. The AUD reverted to type on Thursday and followed stock market movements almost point for point. The early price action saw the currency fade, with the soft close at the NYSE falling from 0.9340 to 0.9190 as risk aversion reared its head. The Oct labour force headline number came in lower-than-expected but the detail remained relatively strong. The AUD was well supported at 0.9200 and managed a decent rally to 0.9330 overnight along with a resurgent NZD, but ran into a wall of sellers which pushed the currency down to 0.9240 on the close.

Major currencies

Woes continue for USD with further cuts firmly on horizon. The markets??™ eyes turned to Fed Chairman Bernanke overnight as he addressed a Congressional panel on the state of the US economy. Most notably his comment that economic growth would remain ???sluggish??™ into the first part of 2008 added further weight to calls for more rate cuts, with the market now pricing in nearly three cuts by September 2008. The USD was again well offered on the back of Bernanke??™s testimony, falling to intraday lows of 1.4705 and 2.1117 against the euro and Sterling respectively. Although the euro remains near all time highs, its gains against the USD were somewhat muted overnight as the European Central Bank left rates on hold and failed to signal further tightening later this year.

Economic data and events

Fed chair Bernanke testified in front of the Joint Economic Committee in Congress. Much of the formal presentation summarised the discussion at the October 31 FOMC meeting (the minutes of which are not due to be released for another two weeks), so the testimony is worth reading in detail. In essence he said that growth has been solid but would slow sharply in Q4, and risks around this view were to the downside. Meanwhile inflation had improved recently but would rise in the short run due to energy and other commodity prices and the weaker US dollar - and this outlook was subject to ???important upside risks???! After cutting rates a further 25bp at that meeting, ???the stance of monetary policy roughly balanced the upside risks to inflation and the downside risks to growth.???
US initial claims fell 17k to 317k, down for the third week running, although the four week average for claims has continued to drift higher (330k in the latest week from 317k in the October payrolls survey week), which does suggest some softening in the labour market.
Japanese Sep machinery orders fell 7.6%. That puts orders up 2.5% in Q3, essentially reversing a similar rate of decline in Q2.
Japanese bank lending edged higher in October. Total lending rose 0.7%yr in October, representing the second 0.1ppt gain in a row. Adjusted for special items, lending was steady at 1.4%yr.
The ECB left the repo rate unchanged at 4.00%. ECB chief Trichet??™s statement at the press conference was little changed from October??™s although the line that ???risks to the medium term [inflation] outlook are fully confirmed to lie on the upside??? was worded more strongly than October??™s ???risks... remain on the upside???.
The Bank of England left the repo rate unchanged at 5.75%. No statement was issued. Expectations of a rate cut in early 2008 persist. On the data front, the leading index fell for the third month running in Sep, and the HBoS house price index posted back to back falls in Sep-Oct.
Canadian housing starts down 22% in Oct. Recent volatility in housing starts mirrors similar volatility in permits data recorded earlier this year. Multiple dwelling starts in Quebec were part of the big rise in September and now the subsequent pullback. Despite this noise, activity in the sector looks stable in underlying terms. However moderation in new house prices (up 0.3% in Sep), hints at a slight slowing in the sector.