New Zealand dollar
NZD continues to mirror Dow Jones. The NZD lacked any real direction during yesterday’s local session trading between 0.7597 and 0.7638 throughout the day. Offshore overnight the NZD continued to mirror the Dow Jones, rising to an intraday high of 0.7693 as the Dow strengthened before selling off slightly late in the piece to close at around 0.7680. Investors also appeared more comfortable getting back on board the carry trade with the NZD/JPY being bought throughout the offshore session, rising from around 90.37 at opening to peak at 92.14. Investors now look forward to employment data out today, with the market forecasting a drop in the unemployment rate on the back of the overall strength of New Zealand’s economy.
Australian dollar
RBA fails to move market. As was widely expected by the market the RBA raised interest rates to 6.50% yesterday, the highest rates seen in Australia in more than a decade. With little to guide the market in the accompanying statement the AUD was relatively unmoved on the back of the announcement, content to wait for the RBA’s quarterly monetary policy statement next Monday for further direction. Offshore overnight the AUD followed the lead of stronger global stock markets, trading from 0.8563 to reach an intra-day high of 0.8636.
Major currencies
USD eases on cautious bearish sentiment. With the Federal Reserve having given no clear indication for the future track of interest rates in the US the dollar succumbed to selling pressure overnight in the absence of the release of any local economic data. The negative sentiment was also fuelled by a news article suggesting China could liquidate its vast holdings of US Treasury bonds if the US imposes trade sanctions on China. Elsewhere, the GBP strengthened on the release of a report suggesting inflationary pressures will lead to one more interest rate rise, while the JPY also fell with renewed appetite for carry trades following the Federal Reserve having downplayed concerns about the impact of US credit problems.
Economic data and events
Japanese machinery orders sink in June. Core orders were down 10.4% in June (-2.4% in Q2), continuing the soggy trend in this series evident since mid last year. Orders have fallen in three of the last four quarters, with the sole rise being a meek +0.3% in 2006Q4. The major source of weakness has been a dramatic cutback in domestic manufacturing demand. This segment has declined for four straight quarters. Foreign demand has been firmer, up for three consecutive quarters.
Japanese bank lending softened in July. The recovery of bank lending after years of retrenchment was an important signpost on Japan's road to economic normalisation. However, credit has failed to establish a ratio to nominal GDP that would indicate that Japan is a normal advanced economy. The ratio peaked at 2.4 to 1 in 2006Q3, but with lending slowing and activity improving, that has declined to less than one half in 2007Q2. This update implies that the third quarter ratio will be closer to one quarter.
US wholesale inventories up 0.5% in June. Another decent gain, which along with a 0.3% rise in factory stocks and a likely rise in retail inventories (some of which may be involuntary given June’s weak sales) should see a strong enough gain in business stocks to prompt an upward revision to the inventories’ contribution to Q2 GDP growth.
The Bank of England’s quarterly inflation report showed that the Bank’s central tendency forecast for the CPI has it edging slightly below 2% in two years time, assuming the repo rate profile reflected in market pricing (another rate hike this year), vs a CPI projection slightly above 2%, assuming rates on hold. Although the BoE stresses that the inflation report is not intended to signal future policy, Westpac’s forecast of modest further BoE tightening in early 2008 (later than the market has been expecting) would be consistent with that.
