Forex: Dollar Vulnerable Before US Durable Goods Orders Data

The US Dollar may face selling pressure if July’s Durable Goods Orders report undermines calls for a Fed move to taper QE asset purchases in September.

Talking Points

US Dollar at Risk if Durable Goods Data Dents Calls for a Fed “Taper” in September
New Zealand Dollar Outperformed in Asia Following Supportive Comments from S&P

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An empty economic calendar in European trading hours shifts investors’ focus to the US data docket. July’s Durable Goods Orders report is in the spotlight. Expectations call for a 4 percent decline from the prior month. While US economic news-flow has broadly outperformed relative to expectations this month, positive momentum seemed to falter last week (according to data compiled by Citigroup). While it is still too early to draw broad-based conclusions, additional evidence over the coming weeks may prove this to be an important turning point. With that in mind, a particularly soft print has scope to shake the baseline Fed monetary policy forecast calling for a move to taper QE asset purchases in September, hinting policymakers may opt to wait longer before pulling back on stimulus. Such an outcome is likely to boost sentiment-sensitive currencies (including AUD and NZD) while punishing the US Dollar.

The New Zealand Dollar outperformed in overnight trade, shrugging off a disappointing set of Trade Balance figures. The currency dipped downward after the year-to-date deficit unexpectedly widened to -NZ$1.69 billion, the largest gap in nearly four years. Losses were promptly erased however after ratings agency Standard & Poor’s said it saw RBNZ has having “strong credibility” on handling inflation, bolstering interest rate hike expectations. The markets are pricing in 70bps in tightening over the coming 12 months, making for the most hawkish outlook in the G10 FX space. The Japanese Yen likewise put in a strong showing as the benchmark Nikkei 225 stock index declined, encouraging an unwinding of carry trades funded cheaply in the perennially low-yielding currency.

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