News and views
New Zealand took some of the spotlight last night, as Europe and the US woke to the news of our possible credit downgrade, S&P putting the country’s foreign currency debt on negative watch. This event raises further the likelihood of large uridashi and eurokiwi redemptions in the next few months, a negative for the NZD.
US equities were better behaved, after the Fed Chairman Bernanke said they may start buying toxic assets from banks, the S&P500 roughly flat at the New Zealand open. Oil (+2%) and copper (+2%) rebounded, although milk powder futures continue being sold (-4%), which augurs poorly for the next Fonterra announcement.
The NZD was sold heavily yesterday, firstly on the NZIER business outlook data, which was dire reading, and then in the afternoon, on the S&P credit downgrade news. Europe and the US continued the move, with the net effect of falling from 0.58 to 0.55, where it has paused.
The AUD also fell in sympathy, even though they were given a “reaffirm” report from S&P, the currency falling from 0.68 at Europe’s open, to 0.66. The AUD/NZD cross spiked upwards, as expected, from 1.18 to 1.21, but buyers are tending to trade smaller ranges in this cross at present, and it would take more negative NZ data to propel it higher.
The EUR continued its weak path, falling from 1.34 to 1.32, as investors expect a 50bp rate cut tomorrow by the ECB. USD/JPY got stuck at 89, with some street whispers of the BoJ putting bids in the market to prevent their currency rallying too much.
The US trade deficit narrowed sharply from a revised deficit of $56.7bn in October to $40.4bn in November. This marked the smallest trade deficit since November 2003. The narrowing was driven by a massive fall in oil imports from $37.2bn to $23.6bn, which was largely but not entirely price-driven. This aside, there were widespread declines in both exports and imports, consistent with recent evidence that global trade has slammed on the brakes.
Japan current account surplus narrows as global economy slows. The Nov current account surplus slipped to ¥581bn nsa from ¥961bn which is a two-thirds reduction from a year ago. Also reported was a trade deficit of ¥0–93bn, in line with the merchandise trade data, along with ongoing deficits in services and transfers.
Japan’s move back towards quantitative easing. December M2 held at 1.8%yr (Nov was revised from 1.7%yr). Similarly, broad liquidity continued at a revised 0.3%yr, lowest in over 5 years. On the other hand, December bank credit (including Shinkin) rose to 3.7%yr, the fastest pace since 2001 and the fastest since 1991 ex-Shinkin.
The UK trade deficit widened to a record £8.33bn in November. The sharply weaker pound is apparently doing little to boost export demand, but it drove import prices another 12% higher for the month following an 11% rise in October.
UK BRC retail sales were down 3.3% y/y in December, the second-worst reading since the survey started in 1995. This industry series is increasingly diverging from the official statistics, and is more consistent with recent anecdotes that UK retailers are in dire straits.
Outlook
The NZD fall over the past 24 hours has been vicious, and a pause here, around 0.55 could be expected. On the day, 0.5450 to 0.5550 should hold, but any risk would be to the downside.
