Thursday, July 14, 2011

USD Bulls Yell ‘Ouch!’ - 14 July 2011

Independent USD weakness has been the main dynamic and you did not have to look far for catalysts. Fed Chairman Bernanke’s testimony highlighted that even though the hurdle for QEIII is exceptionally high, he did not slam shut the door on doing more. The conditions aren’t in place, but they also can’t be dismissed. At the NA close, Moody’s announced that it was placing the US government bond rating on review for ‘possible downgrade’.

Given the rising possibility the statutory debt limit will not be raised on a timely basis. Currency performance was mixed overnight. NZD outperformed on stronger-than-expected GDP, CHF followed close behind. GBP, CAD and AUD were laggards. Modest profit-taking during the Asian session enabled USD to claw back some lost ground from its lows with S&P futures slipping into the red (-0.4%). The main highlights in the day ahead will be US retail sales. Ahead of that, the Italian supply - Italy offer its 5-and 15-yea benchmarks and taps the off the run Feb-17 and Aug-23s.

USD sentiment remains unsteady. US retail sales (cons: 0.0%, 0.4% ex-autos) could be another millstone, if they come in weak. Weakness in auto sales and the pullback in gasoline prices should weigh heavily on the headline. We are below consensus and thinks a negative print is highly likely for the second month in a row (-0.1%). The ‘control’ number (ex-autos, gas, and building materials) should look a bit better as evidence by improved chain store sales activity.

EUR: News that Fitch cut Greece to junk resulted in just a fleeting wobble, as the market realised but this was a catch up move only since Greece was downgraded to Caa1 by Moody’s on June 1 and CCC by S&P on June 13th. EUR/CHF continues to struggle to sustain any rally. EUR/CHF remains near all time lows, below 1.16, but still above 1.15.

Comments by the SNB’s Jordan that raised the spectre of action should deflation risks re-emerge was completely overlooked, as the deflation risks have not re-emerged. NZD: NZ Q1 GDP rose 0.8% in Q1 (cons and RBNZ: 0.3%). Upward revisions worth 0.6% to the past 3 quarters took the y/y rate from 0.7% to 1.4%, suggesting estimates of the output gap will likely have been too low.

On the whole, the data suggest the economy had been tracking better than most had though through Q1. NZ bill futures fell 7bps and NZD stormed higher on the crosses, with NZD/USD hitting yet another post float high at 0.8507.

Published: 14 July, 2011

written by: Bill Hubard , Chief Economist at