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The USD was broadly softer during the overnight session

Tue, Jul 29 2008, 06:02 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The USD was broadly softer during the overnight session, as oil prices rose almost $US2/barrel off what had been multi week lows and European equities were softer ahead of European bank earnings later in the week. US yields fell as Treasuries rallied, eyeing both European equities and then what turned out to be a soft start to the week on Wall Street. The New Zealand dollar was no exception, despite last week’s RBNZ rate cut, with the currency lifting back to 0.7450 – admittedly a modest gain in tight ranges.

The Australian dollar was also stronger against the greenback, closing back in on 0.9600 before backing off to 0.9570.

USD/JPY was a little softer, retreating slightly from what had been a 4 week high during the Asian session. The pair traded as low as 107.35 as the Dow bumped around -175pts in afternoon NY trade, but found some buyers there.

EUR/USD was volatile, with E European buyers fuelling a 50 pip rally to over 1.5760 before a sudden retreat to 1.5720 and then choppy trade mostly around 1.5750.

Fedspeak. Retiring Federal Reserve Governor Frederic Mishkin made one final push in a speech delivered overnight for the central bank to adopt a specific inflation target. Mishkin said a long-run average inflation rate of 2%, or slightly lower, would be an appropriate target for the Fed, saying a “strong nominal anchor can be especially valuable in periods of financial market stress, as we have been experiencing recently, when prompt and decisive policy action may be required to minimize the risk of a severe contraction in economic activity.” In the Q&A that followed, Mishkin said the Fed should target headline rather than core inflation which he said could be biased in the long run. On the other hand, he noted that core inflation was a more useful policy tool for central bankers given that short term headline inflation fell outside the influence of monetary policy.

German GFK consumer confidence fell to its lowest level in more than 5 years in Aug. The Index fell from 3.6 in July to 2.1 in August. Expectations were for only a slight decline to 3.5. Inflation concerns and the recent increase in interest rates by the ECB were said to be the key factors playing on consumers minds.

Outlook

We continue to like NZD/USD lower multi week especially on a TWI basis. Rate cutting cycles from the US Federal Reserve, Bank of England and Bank of Canada over the past 12 months have shown that currencies typically continue to decline through the cycle, despite a market already expecting the future cuts to come.

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Published on  Tue, Jul 29 2008, 06:06 GMT