Forex Exchange Morning Report

New Zealand Dollar: Carry trade unwinding back on?

With regional equity markets recording noticeable falls yesterday and markets still spooked by the US sub-prime mortgage market the focus was very much on the unwinding of the carry trade. NZD/JPY started the day around 94.40 and steadily headed lower which in turn put pressure on the NZD as it struggled to stay above 0.7650. Something had to give and when it did the NZD fell as low as 0.7572 during the offshore timezone with a lot of the flows coming from models reacting to price action rather than discretionary accounts taking big risk aversion bets. NZD/JPY dropped as low as 92.60 but has since recovered to open this morning around 93.05.

Australian Dollar: AUD hit hard on crosses

The AUD suffered for all the same reasons as the NZ dollar with selling pressure on the crosses knocking it from 0.8460 at the open to a 2 week low of 0.8355 overnight. AUD/JPY fell as low as 102.20 from opening levels above 104.00. The AUD managed a mild recovery late NY time to end the session around 0.8380 however more downside tests could be in the offing if we see further fallout from Asian stockmarkets today.

Major Currencies: Yen rebounds on risk aversion

The risk aversion theme continued yesterday, with the further unwinding of yen funded carry trades. As a result, the Japanese currency made broadbased gains rebounding from multi-year lows against the USD and euro. JPY fell from an early high of 123.27 to post an overnight low of 122.23, while EUR/JPY has slipped more than 2% from last week's record highs. Despite a softer than expected US durable goods reading for May, the euro was unable to sustain early gains as focus now turns to tomorrow's FOMC outcome.

Japanese retail sales slightly better than expected in May. The 0.1%yr headline compares to expectations of 0.4% decline, and the -0.7% outcome of the prior month. The ex-automotive series expanded 0.7%yr, against a 1.0% gain in April.

Japanese small business confidence fell back in June. The headline index fell to 48.4 from 49.3 in May. The manufacturing segment came in at 48.7 and the remainder at 48.2.

US durable goods orders down 2.8% in May. After two months of stronger outcomes, durable orders unwound some of their recent recovery in May. It was no surprise that civilian aircraft orders were down 23%; that was consistent with Boeing data. But there was softness elsewhere in the report, including the core capital goods component, down for the first month in three, by 3%. However, this is often a volatile report, reflecting the typically lumpy nature of orders. If we look at the figures on a three month annualised basis, we see that core capital goods orders have turned around from -18% in the three months to Feb, to +7.5% in the May quarter. So the latest data are not soft enough to undermine the view that there is something of a factory sector revival underway in the current quarter; and that business investment is likely to pick up as 2007 progresses. The modest but positive gains in both shipments and inventories are also consistent with an improving activity picture.

UK CBI retail survey down from 31 to 17 in June. June retail sales slowed sharply according to the Confederation of British Industry survey. This could be due to the cooler weather this month, or it could be a correction lower after several stronger readings that did not sit well with the more subdued official retail sales figures of the last few months. Or there may be a genuine consumer slowdown emerging - something that various members of the BoE monetary policy committee suspect is the case. This result does not resolve the issue but it certainly helps keep alive the possibility that the BoE waits a little longer to assess the incoming data flow before tightening again. In other UK news, British Bankers' Association figures showed stronger mortgage lending in May, although that might reflect shifting market share between the various types of lenders.