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Morning Report

The New Zealand dollar lost ground after yesterday's shocking retail sales figures

Fri, May 16 2008, 06:29 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar lost ground after yesterday’s shocking retail sales figures, but reclaimed it all overnight. Sales volumes were much weaker than expected at -1.2% for the quarter – weak auto sales were the main factor, reflecting reduced access to credit and consumer’s increasing caution about big-ticket items – but there was plenty of weakness to be found in the retail sector as well. The NZD fell from 0.7610 to as low as 0.7550 after the data, and remained heavy though most of the overnight session. However, profit-taking on short NZD positions, particularly against the AUD, saw the currency rebound sharply to 0.7640 late in the day.

The Australian dollar was more of a steady performer, rising from 0.9300 to around 0.9420 over the day. Stronger metals prices, including a $20/oz bounce in gold, gave the currency further impetus.

The US dollar was generally weaker overnight, as the relative data flow started to turn against the US again. US industrial production fell 0.7% in April, after a downwardly revised +0.2% in March and versus expectations of -0.3%. There was broad weakness evident in April industrial production with only utilities registering a small gain. April capacity utilization declined to a reported 79.7%, well below the consensus forecast of 80.1%. The Fed NY manufacturing index fell to -3.2 against forecasts of a flat reading, though the Philadelphia survey rose by more than expected to -15.6. And the NAHB homebuilders index slipped to 19 in May, having stabilised around 20 in recent months.

In contrast, European data was relatively solid. Eurozone GDP rose a provisional 0.7% in Q1, much better than market expectations of 0.5%. German GDP provided the greatest surprise with a quarterly gain of 1.5%, the biggest in 12 years. In contrast, output growth in Spain was noticeably weaker than in previous quarters, rising by just 0.3%, while Italian preliminary GDP is not scheduled for publication until 23 May.

Currency markets didn’t all go to plan though. Eurozone CPI was confirmed at 3.3%yr in April, but the core measure fell to 1.6%yr, its lowest since December 2006, against forecasts of 2.0%. The ECB focuses on headline rather than core inflation though, and indeed it’s increasingly difficult to justify excluding food and fuel prices from as ‘volatile’ items. Nevertheless, the euro lost its momentum after these figures, and ended the day slightly down from its opening levels.

Lower interest rates also undermined the USD. Ten-year bond yields fell 10bp for the day, while short-term rates lost around 20bp after an early tick higher. The soft US data undoubtedly would have contributed to this, but most of the moves came well after the data was released. The fall was sparked by rumours that the Fed would expand one of its liquidity facilities, and by a US think-tank report suggesting that the market was wrong to price in Fed rate hikes by year-end; however, the size of the moves probably say more about how the market is positioned, following a sharp rise in US rates since the Bear Stearns bailout in mid-March (short-term rates are up more than 100bp since then).

Outlook

With the New Zealand economy set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, the NZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile supported by weak economic data and the RBNZ’s recent dovish statements. We think that NZD weakness will be more clearly captured through the trade-weighted index, with the US dollar still struggling to make a convincing recovery.

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Published on  Fri, May 16 2008, 06:33 GMT

Archive

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Westpac Institutional Bank  | ABN 33 007 457 14
http://www.westpac.co.nz | natalie_denne@westpac.co.nz