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The Dollar's rebound seems short−lived after one day of respite

Tue, Sep 22 2009, 06:40 GMT
by Saxo Bank Strategy Team

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NZ data astounds – NZD leads currencies higher against the greenback

MAJOR HEADLINES – PREVIOUS SESSION

• US Aug. Leading Indicators out at 0.6% vs. 0.7% expected and revised 0.9% prior

• NZ Q2 C/A Balance out at +NZ$0.124 bln vs. – NZ$1.98 bln expected and revised – NZ$0.681 bln prior

• NZ Account Deficit – GDP Ratio out at -5.9% vs. -7.4% expected and revised -8.1% prior

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• Swiss Growth/Inflation Forecast Update (0545)

• Swiss Trade Data (0615)

• Denmark Consumer Confidence (0730)

• HK CPI (0830)

• CA Retail Sales (1230)

• US Richmond Fed Manufacturing Index (1400)

• US House Price Index (1400)

Market Comments:

The dollar’s recovery which started so well at the beginning of the week appears to be running out of steam already, at least judging by today’s action in Asia. The rebound was starting to look less-convincing as the NY session came to a close and US bond yields drifted back. This came despite another positive reading in US leading indicators in August, +0.6% versus 0.7% expected and an upwardly-revised 0.9% previously. This is the fifth positive month in a row, and are now standing at 18-month highs.

Asian sentiment was to sell the dollar from the open, with the USD index down some 0.3% by midday. Today’s data from New Zealand probably set the negative dollar ball rolling and the slide was broad-based. First out of the starting blocks was the Kiwi, powered along by a dramatic improvement in the country’s current account balance in Q2. The current account registered a surplus for the first time since early 2003 (albeit a tiny NZ$124 mln) and the Q1 deficit was also revised narrower. As a result, the deficit to GDP ratio fell to 5.9% from 8.1%. The improvement would appear to have come from reduced imports as the recession took hold and a steep fall in offshore debt servicing flows. Whether this re-balancing of New Zealand’s external position can be sustained is still uncertain but nevertheless should provide some hope for an improvement for tomorrow’s release of Q2 growth data.

No sooner had the market digested the current account data then Dairy Cooperative Fonterra announced an upward revision to it projected 2009/10 dairy farmer payout by 55 cents per kilo on the back of a recent rebound in dairy prices and rising demand. The NZD took off to the skies, pushing through 0.71 with ease and reaching a mid-morning high of 0.7185. Near term-targets remain 0.7215 and 0.7375. While the NZD goes from strength to strength, NZ forecasting group BERL was quoted in the local press saying that any recovery in the export sector would be choked by the strength of the NZD and forecast tepid growth of just 0.2% in the September and December quarters with annual growth of just 1.2% in the year to 2011. This is dramatically lower than the RBNZ’s forecast of 3.1% for the same period.

Events in the latter half of the week continue to influence short-term direction and sentiment. The FOMC announcement on Wednesday is the first point, with any comments on monetary policy going forward likely to be latched onto. Recall early last week markets were disturbed by a report suggesting two Fed members would call for a rate hike this week. We feel this is certainly premature and the Fed is likely to assert its intention to keep rates low for a longer period of time amid a very slow rebound in economic recovery. That said, we are likely approaching a key juncture when the Fed will have to give indications that it is beginning to withdraw monetary stimulus, especially given that its $300 bln of debt monetization has largely run its course, and any references to exit strategies and the like will be closely scrutinized.

For today, it’s another barren data slate with only Swiss growth/inflation revisions and trade data. North America sees Canadian retail sales and the US Richmond manufacturing index and the FHFA house price index.
Expect direction to be mostly dictated by further position adjustment ahead of the FOMC.

Published on  Tue, Sep 22 2009, 07:21 GMT

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