News and views
Risky assets initially maintained their upward momentum on the back of the fiscal stimulus package announced by China yesterday, but couldn’t sustain those gains through the New York session. The Chinese stimulus package of US$585bn, equivalent to around 7% of GDP, is expected to play a substantial role in propping up growth in China, and by extension the rest of the world. More immediately, though, markets focused on the question of funding – it does not appear that China will increase domestic funding, so the package would have to be paid for by accumulating fewer foreign reserves and/or selling foreign assets, both of which would undermine the US dollar.
NZD crawled its way towards 0.6050 early in the overnight session. However, after a positive open, US equity markets fell into negative territory on concerns about corporate profits and the solvency of the large auto makers. High-yield currencies were dragged lower in sympathy, and at the time of writing NZD/ USD had slipped below 0.5800.
AUD benefited from the Chinese stimulus package and a surprisingly resilient inflation forecast by the RBA, suggesting more limited scope for rate cuts than the market is pricing in. AUD/USD rose to around 0.6980 before falling back to 0.6700 this morning.
EUR returned above 1.2900 but slid back to 1.2750 in the US session. ECB head Trichet said in an interview that he couldn’t rule out a rate cut at the December review. GBP lost ground against the euro, with easing producer price inflation reinforcing the scope for further rate cuts by the Bank of England.
JPY as usual benefited from the market’s loss of risk appetite, reaching 97.00 against the USD and making solid gains on all of the other crosses.
No US data overnight. Veterans’ Day means none tomorrow either.
Japan machinery orders rose 5.5% in September, improving the annual rate from -13% to -4.2%. This was within expectations, retracing only a fraction of the -14.5% plunge in August. Last month, core orders fell to lowest level in fiver years. The downturn in global demand should see orders maintain a downward trajectory. September foreign orders held up better than expected, rising 3.1% to extend the 14.8% August rebound. Nevertheless, the outlook is hardly optimistic, with the orders component of the October manufacturing PMI having dipped to 34.5 from 39.6, the lowest in a survey going back six years.
UK October PPI saw the largest monthly falls since the series began in 1986. Input prices fell 5.6% for the month, bringing the annual rate down from 24.5% to 13.8% (and well off its peak of 30% earlier this year). Output prices fell 1.0%, while the ‘core’ measure fell 0.5%. Inflationary pressure are now clearly easing, largely on the back of lower oil prices, but possibly also due to discounting as manufacturers face softening demand.
Outlook
We are neutral on NZD in the short term. Early signs of an improving risk environment point to some unwinding of recent selling against USD, but it is also likely to lose ground against AUD. Longer term, NZD will need to remain below average for an extended period to soften the blow of a weaker world economy.
