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USD recovers in wake of recent selling

Mon, Dec 3 2007, 06:33 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

New Zealand dollar

NZ dollar weakens on month end. The NZD struggled to rally on Friday despite a dovish interpretation of US Federal Reserve Governor Bernanke’s speech. The comments indicated further rate cuts in the US are only a matter of time. NZD/USD drifted from 0.7695 to 0.7735 during local trading but failed to capitalise on the slow grind higher and succumbed to end of month profit taking and squaring of short US dollar positions. This profit taking and position squaring caused a sharp sell off in the NZD in off-shore trade, pushing it down to 0.7595 before a slight recovery to close at 0.7630.

Australian dollar

AUD supported by data. The AUD managed to gradually strengthen for much of Friday, supported by a stronger than expected Q3 current account number, but gave up its gains prior to the close as month end squaring boosted the USD. The Q3 current account deficit came in slightly better than expected, and combined with the dovish comments from Bernanke boosted the AUD from 0.8810 to 0.8890. Ironically however, the market took the pending rate cuts in the US as a positive for the US economy and hence good for the USD. This, and month end profit taking, pushed down the AUD to 0.8810 before closing at 0.8830.

Major currencies

USD recovers in wake of recent selling. Month-end book squaring and profittaking saw the USD rally sharply on Friday against most currencies as the currency returned back into favour after its recent concerted bout of selling pressure. Ironically, hopes of further interest rates cuts were also being seen to be supporting the USD, with suggestions now being made that cuts will help avoid the U.S. economy from slipping into recession. This was also in response to comments from Federal Reserve Chairman Ben Bernanke, who hinted that the central bank might cut rates to help the economy weather a resurgence of financial markets toil. The USD also received some support when it was reported that Bahrain would maintain the dinar’s peg as OPEC prepares to meet this week amid growing pressure on some Gulf states to depeg their currencies.

Economic data and events

US core PCE deflator 0.2% in Oct. Before rounding it was a milder 0.176%. Personal income grew by a subdued 0.2%, as did personal spending, both representing soft starts to Q4. Construction spending was also weak in Oct, falling 0.8% (including a disappointing fall in the non-residential component).
US Chicago PMI rises from 49.7 to 52.9 in Nov. Production was especially strong, jumping from 47 to 57, while orders were steady at 54. The regional business surveys for Nov have mostly been quite positive, in contrast to the emerging pessimism about the broader economy.
Canadian GDP growth 2.9% annualised in Q3. GDP growth beat expectations despite weaker net exports and slower consumer spending growth. Business investment held up but the surprise was inventory accumulation (adding 3.4 ppts!) which could mean downside risk in Q4.
Euroland inflation spikes to 3.0% yr in Nov. No surprise given the German data earlier this week, but following the news that M3 growth surged to 12.3% yr in Oct, inflation upside risks will continue to dominate European Central Bank thinking.
Euroland business climate indicator jumps from 0.88 to 1.04 in Nov. This follows the upside surprise in the German Ifo. But other EU confidence measures were softer in Nov, including consumer and services sentiment. Overall economic sentiment eased from 106.0 to 104.8.
Euroland GDP growth unrevised at 0.7% in Q3, but annual growth was revised up from 2.6% to 2.7%.
German retail sales fall 3.3% in Oct. The steepest monthly drop this decade, apart from Jan this year after the VAT hike. These figures are subject to big revision, but as they stand suggest a weaker economy in Q4.
UK consumer confidence slips from –8 to –10 in Nov according to GfK.

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Published on  Mon, Dec 3 2007, 06:42 GMT