It didn't matter that Existing Homes Sales in US plunged another 3.8% or Durable Good came...
... up short of expectations at 1.4% or that New Homes fared even worse than the existing stock of housing.
The theme last week for speculators the world over was liquefy, liquefy, liquefy.
As equity markets plunged and commodities corrected, capital came flocking back
into the greenback. As we explained on Friday, “The greenback rally
appears to be driven by technical factors as many speculative trades
from equities to commodities to the carry trade are unwound and those
assets are parked in dollars for the time being.
The fears over the sub-prime problem have finally been realized after
last week commentary by County Wide Finance chief executive Angelo
Mozilo. He noted that he doesn't expect the U.S. housing market to
rebound this year or next. With massive resets of Adjustable Rate
mortgages still facing the market and a very pronounced tightening of
credit conditions over the past several months, the housing recession
is likely to persist and weigh on the overall economy. Therefore while
the dollar may continue to benefit from the technical unwind its rally
may be short lived if the economy falters further. Fed fund rates have
already plunged handicapping a rate cut by December to 5% from the
current 5.25%. Should US rates be lower, the dollar could resume its
decline as capital will resume its search for higher returns.
The question of whether the Fed will cut or not will depends largely on
the state of the growth in the economy. Thats why next weeks data is
likely to be scrutinized even more closely than usual as traders look
for any clues of a significant slowdown. After two consecutive months
of negative spreads between consumer income and spending the market is
looking for an improvement. However, should the number print negative
again it could put further pressure on the buck, indicating further
deterioration of consumer balance sheets. Nevertheless, the true test of
the strength of the US economy will come later in the week as all eyes
will focus on ISM and NFP data. If that news prints in line showing
slow but steady expansion it may pacify the markets for the time
being-BS
Euro Feeling the Weight of Its Gains
On Tuesday the flash PMI reading for the Euro-zone surprised to the
downside and we noted, EZ advance PMI readings fell to 54.8 -
materially weaker than the 55.5 forecast. While EZ manufacturing
remains well above the 50 boom/bust line, todays flash estimate
registered its lowest value in nearly a year and half slipping below the
55.0 level for the first time since February of 2006. Although, like
the consumer readings, the manufacturing data was somewhat ameliorated
by the fact that New Industrial Orders rebounded to 1.7% from -0.6% drop
the month prior, todays report nevertheless suggests that EZ
manufacturing recovery has peaked under the pressure of high exchange
rates. That data was further reinforced by the decline in the IFO
survey leading us to conclude that, The producers in the EZ have been
surprisingly effective in coping with the competitive pressures of a
strong currency however such efficiency cannot last forever and the
effect of a strong euro is likely to dampen demand sooner rather than
later.
Indeed, while the dominant theme in the markets last week was risk
aversion which triggered a technical rebound in the dollar, the
sub-story was the possible peaking of export dependent Euro-zone growth
due to the appreciation in the EURUSD. With both manufacturing and
tourism likely affected the question facing euro bulls is whether
internal demand can pick up the slack and maintain growth momentum.
Next weeks employment numbers and Retails sales figures should provide
some possible answers as to the depth and the strength of the EZ
recovery .BS
Yen Rises as Risk Appetite Falls
On Friday we wrote, Yen has been the key beneficiary of the this move
to risk aversion gaining more than 200 points since yesterday. However,
the unit lost some momentum in late Asia trade as USDJPY once again
traded above 119.00 figure. Despite the power of the carry trade
unwind, the yen is unable to gather even a modicum of support from the
fundamentals. Overnight Japanese data was horrid with Retail Trade
slipping to -0.4% and CPI continuing to contract. Japanese retail
traders have been one of the staunchest sellers of their own currency
and they stepped in to buy the dips in USDJPY tonight helping to
stabilize the fall.
Next week the tug of war should persist as the forces of risk aversion
will continue to cover their yen shorts and the still potent demand of
carry traders who see nothing on the economic horizon to expedite the
BOJ glacial pace of monetary tightening will try to buy every dip in the
yen crosses . Indeed after last weeks lackluster data chances of an
August rate hike have decreased. The market will now focus on the
Overall Household spending figures which will be critical to determining
the health of the consumer. Expectations are for 0.7% rise. If the
number prints in line, the yen may get a boost ob speculation that an
August rate may yet take place, but a miss would almost certainly take
that scenario off the table. None of this however will assure further
yen weakness if the turmoil in global equity markets continues. In a
battle between carry trades and risk aversion, the latter has the upper
hand. BS
British Pound Punished on Risk Aversion, Potential for Bounce?
The British Pound saw an extraordinarily volatile week of trade,
setting fresh 26-year highs before matching its worst single-week
decline since September of 2006. A remarkable carry trade unwind forced
traders to liquidate overextended GBP longs across the board, sparking
especially noteworthy moves against the oversold Japanese Yen. Economic
data was relatively sparse on the week, but fears of global credit
tightening led a flight to safety in virtually all global asset classes.
Such a dynamic has undoubtedly hurt outlook for the British currency,
but it remains to be seen that this unwind will continue through the
short term. According to our Technical Currency Analyst Jamie Saettele,
the Sterling is due for further decline against the Swiss Franc through
coming trade.
Outlook for Cables performance against the US dollar is similarly
pessimistic; the GBPUSD may not see significant support until a test of
a year-long trendline near the psychologically significant 2.0000 mark.
From a more fundamental standpoint, the British currency will see little
boost from economic data through the coming week. A pending Bank of
England interest rate decision is highly unlikely to show a rate
increase, and the central bank does not release commentary on unchanged
policy.
The early going will see little foreseeable event risk on the
second-tier GfK and Nationwide Consumer Confidence surveys, but
continued volatility across financial markets may nonetheless make for
choppy trading. This will almost entirely depend on the performance of
risky assets across the world, with Sunday nights Asian market open to
prove especially important for the outlook on the week ahead. Given that
the carry trade is inextricably linked to Japan and other regional
markets, speculators will likely show their true colors and outlook for
high-yielding currencies as soon as they hit their desks at the open.
Late tumbles in North American equity markets suggest that the Japanese
Nikkei index may open trade substantively lower, but this does not rule
out a later rebound on improved appetite for risk. Pending such a
turnaround, we could see the British Pound catch some relief against the
Japanese Yen and other lower-yielding currencies. DR
Swissie Looks to Slide on Diminished Rate Expectations
The Swiss Franc lost ground against the US dollar, as softened interest
rate expectations hurt outlook for the European currency. All was not
lost for the Swissie, however, with an overall theme of carry trade
unwinds sending the CHF significantly higher against the high-flying
British Pound and Euro. Speculators scaled back overextended positioning
in the popular GBPCHF and EURCHF pairs, but it remains to be seen if
such moves will be sustained through the short term. Swiss interest
rate futures have been steadily on the rise, leaving implied rate
expectations lower through the end of the year. Once a key source of
Swiss Franc support, the falling future yields threaten to derail what
was a promising rebound in the downtrodden currency. Limited economic
data stepped in to boost the currencys cause, however, with the KOF
Institute Leading Index rising well-above consensus forecasts at
10-month highs of 2.13 in July. The gain from June levels represents the
sixth consecutive increase in the index, which certainly bodes well for
outlook on domestic growth. Yet such data may do push the CHF higher if
higher price pressures do not follow. More specifically, we will need to
see the upcoming weeks Consumer Price Index data impress for the
Swissie to outperform is European and North American counterparts.
Event risk will pick up in the coming days, with market-moving SVME
Purchasing Managers Index and CPI numbers to drive foreseeable
volatility in CHF pairs. The former is likely to show that industrial
growth remains healthy in the small European economy, yet a positive
result will come to little of the later CPI data disappoints. A soft
Producer and Import Price Index reading suggests that the
Consumer-linked measure may be similarly subdued, keeping pressure off
of the Swiss National Bank to tighten monetary policy through the end of
the year. Futures currently show that markets expect at least 50 basis
points of rate increases through December. Whether or not this comes to
bear will hinge on upcoming inflation data, and surprises in either
direction will likely drive strong moves in the CHF. - DR
Canadian Dollar Makes Big Technical Turn, Data Comes On Line
Though it was a relatively quiet week for Canadian fundamentals last
week, the loonie was on the move. The mood surrounding USDCAD changed
dramatically from through this relatively short period. In the first
half of the week, the pair was certainly moving in favor of the Canadian
currency as traders bid it to a new record high (at least 30 years at
least) against its US counter part. The last gasp of the loonies
long-held rally came on Tuesday when a surprise jump in retail sales
drove the single unit one percent higher. According to Statistics
Canadas report, Canadian consumers spent 2.8 percent more at
retailers shops in May, the biggest one-month increase in nearly a
decade. This report led some market participants to label this indicator
as proof positive that the central bank would pursue another hike at its
next meeting on September 5th. However, after this release and the sharp
move, the high loonie quickly came under the spot light with no other
market-worthy indicators due for the rest of the week. With no
technicals in sight and fundamental traders having to weigh the
possibility of further BoC rate hikes against the extreme exchange rate,
it seemed only a matter of time before the market sought relief. The
reprieve came relatively quickly on Wednesday when whispers of risk
aversion started to earn headlines. Global equity markets marked the
start of a violent turn while yields on corporate and government bonds
started to back off. When FX traders looked to cut their own risky
trades, long Canadian dollars seemed to top that list.
For the week ahead, the Canadian dollar will likely come back under the
umbrella of risk aversion. Should any of the major high-risk trades
(i.e. equities, carry trades, etc.) continue to decline, it could easily
sweep the up Canadian dollar with. Since the unit is still within arms
reach of record highs against the US dollar which happens to be the
most liquid and attached to the worlds largest economy - it is still
deep in overbought territory. However, should these large equity
corrections prove to be temporary like the shake up in late February and
the term risk aversion fade into the background, fundamental loonie
traders will still have a number of releases from the economic docket on
which to base their trades off of. The data push will begin early with
Tuesdays GDP report for may. After growth stagnated in the previous
month, the expected 0.4 percent increase is looking pretty good.
Following up on the heels of this top-tier indicator, the Ivey PMI and
building permits releases will put in for price action. Both are
expected to cross the wires with disappointing results. - JK
Australian Dollar Sustains Heavy Damage, Can An RBA Hike Help?
The Australian dollar was looking at heavy losses across the board last
week. Indeed, the only place the Aussie looked like it was able to hold
any kind of bid was against the New Zealand currency, which was
consequently embroiled in a tumble of its own. Looking back over the
events for the week, there were two clearly conflicting forces playing
on the Aussie dollar. Arguably the overwhelming component of this
specific move was a global bout of risk aversion and subsequent carry
trade unwinding. While the seeds for such a move have been incubating
for some time, it seems the trigger for a wave of risk aversion came
from further grumblings in the US housing market. From there, the damage
spread as global equity markets pitched into sharp declines marked by
major technical breaks in the some of the leading benchmark indices. No
matter where investors had their capital: international stocks,
government yields, corporate credit spreads or currencies; the impact
was felt everywhere. For the FX market, the impact was clearly read in
the majors and the crosses. From both sides of the lucrative carry (the
Japanese yen and Swiss Franc to the Australian and New Zealand dollars),
the shift was dramatic. Now, the question remains, is this the true turn
in risk aversion or is this another round of pressure relief that draws
speculators back to high yielding/high risk trades.
The other major issue controlling price action for the Aussie dollar
last week was speculation surrounding the likelihood of a rate hike from
the RBA. There were only two noteworthy indicators crossing the economic
calendar over the period - PPI and CPI - and neither sealed the deal for
the central bank. The factory-level inflation number decelerated to a
three-year low 2.3 percent in is annual figure. At the same time, the
favored consumer report slowed to 2.1 percent - nearly inline with the
RBAs target. On the other hand, core inflation gauges are just below
the 3.0 percent tolerance limit. Looking at the calendar for the week
ahead, the rate debate will only heat up. There are a number of growth
and inflation reports scheduled for release that will add to the
outlook. Key among this list of market-worthy reports are the NABs
quarterly business sentiment gauge, retail sales for the second quarter
and TD Securities leading inflation figures for July. If the RBA
doesnt have the ingredients for a hike come August 7th, a move may
be deferred from some time as the national election closes in. JK
Kiwi Loses Support on Carry Trade Unwind, Dovish Rate Outlook
The New Zealand Dollar saw its worst weekly performance since March, as
a sharp carry trade unwind and a dovish central bank doomed the currency
to a pronounced sell-off. A mid-week Reserve Bank of New Zealand
interest rate hike actually led to a subsequent Kiwi drop. The largely
expected rate increase came on increasingly dovish commentary from RBNZ
Governor Alan Bollard. In the attached communique, Bollard claimed “New
Zealanders have been showing early signs of moderating their borrowing.
Provided they keep this up, and the pressure on resources continues to
ease, we think the four successive OCR increases we have delivered will
be sufficient to contain inflation." Subject to the mentioned caveats,
he essentially told markets that the RBNZ may be done in its recent
tightening cycle removing a key pillar of support from NZD pairs. The
Kiwi still maintains one of the highest yields of any major world
currency pair, but an outlook for unchanged rates certainly stands to
push it lower against currencies with rate increases on the horizon. The
upcoming week may see a relatively quiet period of trade, as event risk
will be limited to a second-tier NBNZ Business Confidence Survey.
The New Zealand dollar is likely to trade off of new developments in
the global carry trade phenomenon, with the recent rout leaving pairs
susceptible to a retrace of extended declines. Though markets are likely
to put popular high-yielding pairs through their paces on an unwind of
overextended Japanese Yen shorts, looking at the past tells us that the
carry trade may nonetheless see a grind higher through the medium term.
One only has to look back to the late February/early March carry
shakeout to see that pairs like the NZDJPY and AUDJPY rebounded in
trading that followed. The Kiwi-Yen pair is currently in the midst of
its worst drawdown of the year, but this arguably allows for better
entry on longer-term focused carry trade longs. Whether or not such a
retrace occurs will largely depend on the performance of global equity
markets, but a stabilization in worldwide stock indices may pave the way
for a continuation of Japanese Yen declines. The losing yield advantage
of the New Zealand dollar perhaps leaves it susceptible to further
drawdowns against the Australian dollar, however, as the Aussie looks
forward to a near-certain rate increase in the coming August Reserve
Bank of Australia meeting. - DR
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com
FXCM, L.L.C.® assumes no responsibility for errors, inaccuracies or
omissions in these materials. FXCM, L.L.C.® does not warrant the
accuracy or completeness of the information, text, graphics, links or
other items contained within these materials. FXCM, L.L.C.® shall not be
liable for any special, indirect, incidental, or consequential damages,
including without limitation losses, lost revenues, or lost profits that
may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results
... up short of expectations at 1.4% or that New Homes fared even worse than the existing stock of housing.
The theme last week for speculators the world over was liquefy, liquefy, liquefy.
As equity markets plunged and commodities corrected, capital came flocking back
into the greenback. As we explained on Friday, “The greenback rally
appears to be driven by technical factors as many speculative trades
from equities to commodities to the carry trade are unwound and those
assets are parked in dollars for the time being.
The fears over the sub-prime problem have finally been realized after
last week commentary by County Wide Finance chief executive Angelo
Mozilo. He noted that he doesn't expect the U.S. housing market to
rebound this year or next. With massive resets of Adjustable Rate
mortgages still facing the market and a very pronounced tightening of
credit conditions over the past several months, the housing recession
is likely to persist and weigh on the overall economy. Therefore while
the dollar may continue to benefit from the technical unwind its rally
may be short lived if the economy falters further. Fed fund rates have
already plunged handicapping a rate cut by December to 5% from the
current 5.25%. Should US rates be lower, the dollar could resume its
decline as capital will resume its search for higher returns.
The question of whether the Fed will cut or not will depends largely on
the state of the growth in the economy. Thats why next weeks data is
likely to be scrutinized even more closely than usual as traders look
for any clues of a significant slowdown. After two consecutive months
of negative spreads between consumer income and spending the market is
looking for an improvement. However, should the number print negative
again it could put further pressure on the buck, indicating further
deterioration of consumer balance sheets. Nevertheless, the true test of
the strength of the US economy will come later in the week as all eyes
will focus on ISM and NFP data. If that news prints in line showing
slow but steady expansion it may pacify the markets for the time
being-BS
Euro Feeling the Weight of Its Gains
On Tuesday the flash PMI reading for the Euro-zone surprised to the
downside and we noted, EZ advance PMI readings fell to 54.8 -
materially weaker than the 55.5 forecast. While EZ manufacturing
remains well above the 50 boom/bust line, todays flash estimate
registered its lowest value in nearly a year and half slipping below the
55.0 level for the first time since February of 2006. Although, like
the consumer readings, the manufacturing data was somewhat ameliorated
by the fact that New Industrial Orders rebounded to 1.7% from -0.6% drop
the month prior, todays report nevertheless suggests that EZ
manufacturing recovery has peaked under the pressure of high exchange
rates. That data was further reinforced by the decline in the IFO
survey leading us to conclude that, The producers in the EZ have been
surprisingly effective in coping with the competitive pressures of a
strong currency however such efficiency cannot last forever and the
effect of a strong euro is likely to dampen demand sooner rather than
later.
Indeed, while the dominant theme in the markets last week was risk
aversion which triggered a technical rebound in the dollar, the
sub-story was the possible peaking of export dependent Euro-zone growth
due to the appreciation in the EURUSD. With both manufacturing and
tourism likely affected the question facing euro bulls is whether
internal demand can pick up the slack and maintain growth momentum.
Next weeks employment numbers and Retails sales figures should provide
some possible answers as to the depth and the strength of the EZ
recovery .BS
Yen Rises as Risk Appetite Falls
On Friday we wrote, Yen has been the key beneficiary of the this move
to risk aversion gaining more than 200 points since yesterday. However,
the unit lost some momentum in late Asia trade as USDJPY once again
traded above 119.00 figure. Despite the power of the carry trade
unwind, the yen is unable to gather even a modicum of support from the
fundamentals. Overnight Japanese data was horrid with Retail Trade
slipping to -0.4% and CPI continuing to contract. Japanese retail
traders have been one of the staunchest sellers of their own currency
and they stepped in to buy the dips in USDJPY tonight helping to
stabilize the fall.
Next week the tug of war should persist as the forces of risk aversion
will continue to cover their yen shorts and the still potent demand of
carry traders who see nothing on the economic horizon to expedite the
BOJ glacial pace of monetary tightening will try to buy every dip in the
yen crosses . Indeed after last weeks lackluster data chances of an
August rate hike have decreased. The market will now focus on the
Overall Household spending figures which will be critical to determining
the health of the consumer. Expectations are for 0.7% rise. If the
number prints in line, the yen may get a boost ob speculation that an
August rate may yet take place, but a miss would almost certainly take
that scenario off the table. None of this however will assure further
yen weakness if the turmoil in global equity markets continues. In a
battle between carry trades and risk aversion, the latter has the upper
hand. BS
British Pound Punished on Risk Aversion, Potential for Bounce?
The British Pound saw an extraordinarily volatile week of trade,
setting fresh 26-year highs before matching its worst single-week
decline since September of 2006. A remarkable carry trade unwind forced
traders to liquidate overextended GBP longs across the board, sparking
especially noteworthy moves against the oversold Japanese Yen. Economic
data was relatively sparse on the week, but fears of global credit
tightening led a flight to safety in virtually all global asset classes.
Such a dynamic has undoubtedly hurt outlook for the British currency,
but it remains to be seen that this unwind will continue through the
short term. According to our Technical Currency Analyst Jamie Saettele,
the Sterling is due for further decline against the Swiss Franc through
coming trade.
Outlook for Cables performance against the US dollar is similarly
pessimistic; the GBPUSD may not see significant support until a test of
a year-long trendline near the psychologically significant 2.0000 mark.
From a more fundamental standpoint, the British currency will see little
boost from economic data through the coming week. A pending Bank of
England interest rate decision is highly unlikely to show a rate
increase, and the central bank does not release commentary on unchanged
policy.
The early going will see little foreseeable event risk on the
second-tier GfK and Nationwide Consumer Confidence surveys, but
continued volatility across financial markets may nonetheless make for
choppy trading. This will almost entirely depend on the performance of
risky assets across the world, with Sunday nights Asian market open to
prove especially important for the outlook on the week ahead. Given that
the carry trade is inextricably linked to Japan and other regional
markets, speculators will likely show their true colors and outlook for
high-yielding currencies as soon as they hit their desks at the open.
Late tumbles in North American equity markets suggest that the Japanese
Nikkei index may open trade substantively lower, but this does not rule
out a later rebound on improved appetite for risk. Pending such a
turnaround, we could see the British Pound catch some relief against the
Japanese Yen and other lower-yielding currencies. DR
Swissie Looks to Slide on Diminished Rate Expectations
The Swiss Franc lost ground against the US dollar, as softened interest
rate expectations hurt outlook for the European currency. All was not
lost for the Swissie, however, with an overall theme of carry trade
unwinds sending the CHF significantly higher against the high-flying
British Pound and Euro. Speculators scaled back overextended positioning
in the popular GBPCHF and EURCHF pairs, but it remains to be seen if
such moves will be sustained through the short term. Swiss interest
rate futures have been steadily on the rise, leaving implied rate
expectations lower through the end of the year. Once a key source of
Swiss Franc support, the falling future yields threaten to derail what
was a promising rebound in the downtrodden currency. Limited economic
data stepped in to boost the currencys cause, however, with the KOF
Institute Leading Index rising well-above consensus forecasts at
10-month highs of 2.13 in July. The gain from June levels represents the
sixth consecutive increase in the index, which certainly bodes well for
outlook on domestic growth. Yet such data may do push the CHF higher if
higher price pressures do not follow. More specifically, we will need to
see the upcoming weeks Consumer Price Index data impress for the
Swissie to outperform is European and North American counterparts.
Event risk will pick up in the coming days, with market-moving SVME
Purchasing Managers Index and CPI numbers to drive foreseeable
volatility in CHF pairs. The former is likely to show that industrial
growth remains healthy in the small European economy, yet a positive
result will come to little of the later CPI data disappoints. A soft
Producer and Import Price Index reading suggests that the
Consumer-linked measure may be similarly subdued, keeping pressure off
of the Swiss National Bank to tighten monetary policy through the end of
the year. Futures currently show that markets expect at least 50 basis
points of rate increases through December. Whether or not this comes to
bear will hinge on upcoming inflation data, and surprises in either
direction will likely drive strong moves in the CHF. - DR
Canadian Dollar Makes Big Technical Turn, Data Comes On Line
Though it was a relatively quiet week for Canadian fundamentals last
week, the loonie was on the move. The mood surrounding USDCAD changed
dramatically from through this relatively short period. In the first
half of the week, the pair was certainly moving in favor of the Canadian
currency as traders bid it to a new record high (at least 30 years at
least) against its US counter part. The last gasp of the loonies
long-held rally came on Tuesday when a surprise jump in retail sales
drove the single unit one percent higher. According to Statistics
Canadas report, Canadian consumers spent 2.8 percent more at
retailers shops in May, the biggest one-month increase in nearly a
decade. This report led some market participants to label this indicator
as proof positive that the central bank would pursue another hike at its
next meeting on September 5th. However, after this release and the sharp
move, the high loonie quickly came under the spot light with no other
market-worthy indicators due for the rest of the week. With no
technicals in sight and fundamental traders having to weigh the
possibility of further BoC rate hikes against the extreme exchange rate,
it seemed only a matter of time before the market sought relief. The
reprieve came relatively quickly on Wednesday when whispers of risk
aversion started to earn headlines. Global equity markets marked the
start of a violent turn while yields on corporate and government bonds
started to back off. When FX traders looked to cut their own risky
trades, long Canadian dollars seemed to top that list.
For the week ahead, the Canadian dollar will likely come back under the
umbrella of risk aversion. Should any of the major high-risk trades
(i.e. equities, carry trades, etc.) continue to decline, it could easily
sweep the up Canadian dollar with. Since the unit is still within arms
reach of record highs against the US dollar which happens to be the
most liquid and attached to the worlds largest economy - it is still
deep in overbought territory. However, should these large equity
corrections prove to be temporary like the shake up in late February and
the term risk aversion fade into the background, fundamental loonie
traders will still have a number of releases from the economic docket on
which to base their trades off of. The data push will begin early with
Tuesdays GDP report for may. After growth stagnated in the previous
month, the expected 0.4 percent increase is looking pretty good.
Following up on the heels of this top-tier indicator, the Ivey PMI and
building permits releases will put in for price action. Both are
expected to cross the wires with disappointing results. - JK
Australian Dollar Sustains Heavy Damage, Can An RBA Hike Help?
The Australian dollar was looking at heavy losses across the board last
week. Indeed, the only place the Aussie looked like it was able to hold
any kind of bid was against the New Zealand currency, which was
consequently embroiled in a tumble of its own. Looking back over the
events for the week, there were two clearly conflicting forces playing
on the Aussie dollar. Arguably the overwhelming component of this
specific move was a global bout of risk aversion and subsequent carry
trade unwinding. While the seeds for such a move have been incubating
for some time, it seems the trigger for a wave of risk aversion came
from further grumblings in the US housing market. From there, the damage
spread as global equity markets pitched into sharp declines marked by
major technical breaks in the some of the leading benchmark indices. No
matter where investors had their capital: international stocks,
government yields, corporate credit spreads or currencies; the impact
was felt everywhere. For the FX market, the impact was clearly read in
the majors and the crosses. From both sides of the lucrative carry (the
Japanese yen and Swiss Franc to the Australian and New Zealand dollars),
the shift was dramatic. Now, the question remains, is this the true turn
in risk aversion or is this another round of pressure relief that draws
speculators back to high yielding/high risk trades.
The other major issue controlling price action for the Aussie dollar
last week was speculation surrounding the likelihood of a rate hike from
the RBA. There were only two noteworthy indicators crossing the economic
calendar over the period - PPI and CPI - and neither sealed the deal for
the central bank. The factory-level inflation number decelerated to a
three-year low 2.3 percent in is annual figure. At the same time, the
favored consumer report slowed to 2.1 percent - nearly inline with the
RBAs target. On the other hand, core inflation gauges are just below
the 3.0 percent tolerance limit. Looking at the calendar for the week
ahead, the rate debate will only heat up. There are a number of growth
and inflation reports scheduled for release that will add to the
outlook. Key among this list of market-worthy reports are the NABs
quarterly business sentiment gauge, retail sales for the second quarter
and TD Securities leading inflation figures for July. If the RBA
doesnt have the ingredients for a hike come August 7th, a move may
be deferred from some time as the national election closes in. JK
Kiwi Loses Support on Carry Trade Unwind, Dovish Rate Outlook
The New Zealand Dollar saw its worst weekly performance since March, as
a sharp carry trade unwind and a dovish central bank doomed the currency
to a pronounced sell-off. A mid-week Reserve Bank of New Zealand
interest rate hike actually led to a subsequent Kiwi drop. The largely
expected rate increase came on increasingly dovish commentary from RBNZ
Governor Alan Bollard. In the attached communique, Bollard claimed “New
Zealanders have been showing early signs of moderating their borrowing.
Provided they keep this up, and the pressure on resources continues to
ease, we think the four successive OCR increases we have delivered will
be sufficient to contain inflation." Subject to the mentioned caveats,
he essentially told markets that the RBNZ may be done in its recent
tightening cycle removing a key pillar of support from NZD pairs. The
Kiwi still maintains one of the highest yields of any major world
currency pair, but an outlook for unchanged rates certainly stands to
push it lower against currencies with rate increases on the horizon. The
upcoming week may see a relatively quiet period of trade, as event risk
will be limited to a second-tier NBNZ Business Confidence Survey.
The New Zealand dollar is likely to trade off of new developments in
the global carry trade phenomenon, with the recent rout leaving pairs
susceptible to a retrace of extended declines. Though markets are likely
to put popular high-yielding pairs through their paces on an unwind of
overextended Japanese Yen shorts, looking at the past tells us that the
carry trade may nonetheless see a grind higher through the medium term.
One only has to look back to the late February/early March carry
shakeout to see that pairs like the NZDJPY and AUDJPY rebounded in
trading that followed. The Kiwi-Yen pair is currently in the midst of
its worst drawdown of the year, but this arguably allows for better
entry on longer-term focused carry trade longs. Whether or not such a
retrace occurs will largely depend on the performance of global equity
markets, but a stabilization in worldwide stock indices may pave the way
for a continuation of Japanese Yen declines. The losing yield advantage
of the New Zealand dollar perhaps leaves it susceptible to further
drawdowns against the Australian dollar, however, as the Aussie looks
forward to a near-certain rate increase in the coming August Reserve
Bank of Australia meeting. - DR
DailyFX Research Team
Forex Capital Markets LLC
32 Old Slip, 10th Floor
New York, NY 10004
Tel (212) 897-7660
Fax (212) 897-7669
E-mail: research@dailyfx.com
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may result from these materials. Opinions and estimates constitute our
judgment and are subject to change without notice. Past performance is
not indicative of future results
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