Amid a very light night for data delivery, the USD gained broadly, while risk appetite recovered smartly after a shaky start first thing Monday morning.
NZD/USD finally broke below important support at 0.65.
Asian equity indices mostly closed lower yesterday, following risk-defensive cues from currencies at the week’s open.
But European peers, while initially weaker, clawed their way to flat or slightly higher. US indices look on track for modest gains, a small rebound after last week’s bleak performance.
In currencies, JPY’s initial safe-haven bid evaporated as risk sentiment improved, with its sell-off accelerating after a low-ball GDP print, putting the country back in recession for the second time since late-2012.
Weakness in business investment was the primary culprit. While some observers might see this as additional pressure on the BoJ to expand policy easing, we’d point to the 2.0% y/y price gains implied by GDP.
Japan seems more likely to use tools other than monetary policy in the first instance. We see the BoJ on hold until at least the Fed’s December meeting.
JPY weakness contributed to broader USD strength, with Bloomberg’s Dollar Spot Index up near the multi-year highs hit earlier this month.
EUR remains under heavy pressure, back below 1.07, despite a positive surprise in European core inflation. ECB officials continue to note that further easing in December is not guaranteed, with Executive Board member Mersch the latest.
Of note, Mersch noted the difficulties of ceasing the current €60b monthly bond purchase program overnight, alluding to the prospect of some form of tapering after the September 2016 (current) end-date. We suspect that an announcement to that effect, combined with the widely-expected deposit rate cut, would slightly disappoint the market’s expectations.
NZD/USD sheared through 0.65 last night, with the market seemingly hit by a large sell order in the London session. There were no proximate fundamental drivers. This came despite a marginally positive upgrade to Fonterra’s earnings guidance, and an upside surprise in the local retail sales report.
That 0.65 level now marks initial resistance, and 0.6420 is the next line of support. Tonight’s dairy auction has the potential to break the former, with indicators negative. Today’s RBNZ 2-year inflation expectations measure will also be watched for signs of slippage.
We’ll be watching RBA Assistant Governor Kent’s speech this morning, favouring that over the Minutes later today. The US CPI report is the offshore highlight tonight.
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Raiko Shareef is on the BNZ Research team. All its research is available here.