Talking Points

New Zealand Dollar Sinks as Trade Deficit Hits the Widest in 4 Years
Australian Dollar Mildly Lower on RBA Financial Stability Review
US Dollar Looks to Durable Goods, Home Sales Data for “Taper” Clues

The New Zealand Dollar underperformed against the major currencies in overnight trade after a disappointing Trade Balance report weighed on investors’ rosy RBNZ monetary policy expectations. The data showed a year-to-date trade deficit of -NZ$2.06 billion in August compared with a gap of –NZ1.68 billion in the prior month, marking the worst outcome in four years. Economists’ forecasts called for the shortfall to narrow to -NZ$1.55 billion ahead of the release. Traders are now pricing in 75 basis points in RBNZ interest rate hikes over the coming 12 months, down from a recent high of 97 basis points recorded mid-month. We suggested that NZD/USD could be topping last week.

The Australian Dollar faced moderate downward pressure after the RBA said that modest credit growth presents a strategic challenge for local banks in its Financial Stability Review publication. The central bank added that conditions in the business sector continue to fall below trend averages. Taken together, these comments seemed to beckon further interest rate cuts. However, the report went on to caution against excess speculation – particularly in the housing market – against a backdrop of low borrowing costs. That seemed to suggest policymakers are in fact weary of easing further, meaning the report’s negative implications for the Aussie are likely to be short-lived. We continue to hold long AUD/USD.

A quiet calendar in European trading hours is likely to see the spotlight shift to US economic data once again. Augusts’ Durable Goods Orders and New Home Sales figures are on tap. The former is expected to show a 0.2 percent decline, a modest improvement compared with July’s 7.4 percent drawdown. Home Sales are seen rising 6.6 percent after recording a 13.4 percent decline in July, marking the worst print since mid-2010. The markets are likely to continue to interpret US news-flow in terms of its implications for shaping Fed QE “taper” expectations. With that in mind, soft outcomes that argue against a move to reduce asset purchases in the near term stand to weigh on the US Dollar.Needless to say, results on the strong side of expectations stand to produce the opposite result.

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