News and views
Appetite for risk gained strength from London into New York, backed by the DJIA being less volatile than usual and holding good gains into the NY afternoon (300pts) as the US public went to the polls. Equity volatility index VIX dropped sharply to the mid-40s from 54% on Monday while USD funding improved further, 3 month LIBOR slipping to 2.71% from 2.86%. USD lost substantial safe haven/ repatriation demand, with Asian central banks reported big USD sellers. NZD/USD enjoyed the improved appetite for risk, sitting around 0.6065 in NY (high 0.6129) versus a 0.58 handle late Asia-Pacific.
AUD/USD traded 0.6634-0.7001 in London, leaving behind the post-RBA selling in a more positive global environment. Commodities rallied across the board on USD weakness.
It was one-way traffic on EUR/USD, as it extended its late Asia rally without interruption from the 1.2600 area in early London to break 1.3000 in NY which is reportedly the euro’s largest daily gain since its 1999 launch – a bit of a surprise!
USD/JPY gained steadily from just under 99.00 as London came in to as high as 100.50/55 in NY as risk aversion eased and various yen crosses rallied sharply.
US factory orders down –2.5% in Sep. The decline was due to a 5.5% drop in non-durables, mostly but not all due to lower prices for energy orders. Durable orders, previously reported at up 0.8%, were revised to a 0.9% gain. Recent weak business surveys for October suggest orders will fall away further in Q4.
US weekly retail reports mixed. Chains store sales rose 0.6% in the fourth retail week of October, following a 0.5% rise in the prior week, the first back to back gains in this series since August. However the Redbook retail average was a touch weaker at –1.2%. Notwithstanding these figures, next week’s retail sales report for October will be very weak, with auto sales slumping 16% and gasoline prices down around 20% in the month. Our preliminary forecast is for retail sales to fall 3%, which would be the steepest one month decline for decades.
Dallas Fed president Richard Fisher admitted that the risk of higher inflation that saw him voting for Fed retightening as recently as August, “froze in its tracks” as the credit crunch really took hold in September.
Euroland PPI eases from 8.5% yr to 7.9% yr in Sep. This was despite previous German data showing a presumably temporary blip higher in her PPI in September.
UK construction PMI falls from 38.8 to 35.1 in Oct. The news from the UK housing and broader construction sector just keeps getting worse, with house prices collapsing, the banks not lending and buyers staying away.
Outlook
We are neutral NZD/USD short term. With NZD/USD now probing the 0.60/0.62 area we have been awaiting, we are tempted to sell into this strength. We see AUD/NZD higher, with scope for 1.18 multi-day, as an improved risk environment encourages unwinding of some of the excessive AUD shorts.
