Forex Exchange Morning Report

New Zealand Dollar: NZD carries on.

The NZD hovered just under 0.7700 on Friday as GDP printed in line with market expectations of 1.0% and slightly higher than RBNZ forecasts of 0.8%. During the overnight session the NZD surged to fresh 25 year highs against the USD, hitting a peak of 0.7740 as market participants got back on board the carry trade. The NZD was also driven higher as investors sold USD overnight, reacting to higher oil prices and weaker than expected personal income and spending data out of the US.

Australian Dollar: AUD hits fresh highs.

With a lack of data out of Australia on Friday, the AUD traded in a tight range of 0.8462 to 0.8482 during our session. During the offshore session weaker-than-expected US data coupled with higher oil prices saw the AUD break through 0.8500 and hit a new 18 year high of 0.8522 against the USD. With the market looking ahead to the RBA’s interest rate announcement on Wednesday, market participants signalled overnight that they have moved on from recent days of risk aversion with the carry trade back in vogue, prompting AUD buying.

Major Currencies: Easing inflation concerns see USD ease.

The USD eased back on Friday, particularly against the euro and JPY, with investors preferring to step back from the currency in the wake of the Federal Reserve keeping benchmark interest rates unchanged last week. With the Fed having suggested core inflation has eased of late, pundits appear to have boosted their view that interest rates will now remain steady for some time. This view was further confirmed when data released showed US May inflation as measured by core personal consumption expenditure was in line with expectations. Elsewhere, the GBP continued to rally, firmly holding above 2.0000 on growing expectations of two further rate hikes by the BoE, the first hike being expected as early as this week.

Overnight News

The US May core PCE deflator rose 0.1%. This lowered annual inflation in this series to below the Fed’s key 2% comfort zone, which saw yields fall briefly.

US May personal income increased by 0.4% and consumption by 0.5%. Wages and salaries were up 0.4%, while the consumption increase was driven by non-durables up 1.4%.

US May construction spending leapt 0.9%. Non-residential drove the increase (up 2.5%), while residential investment remains in the doldrums (down another 0.8%).

US June Chicago PMI held up better than expected, with only a small fall to 60.2 vs May’s surprisingly strong 61.7. New orders, production, and employment all remain at historically solid levels.

US June UoM consumer sentiment was revised up to 85.3, a little stronger than expected. The level remains well below the May outturn, reflecting higher energy prices and interest rates.

Euroland data: June economic sentiment fell to 111.5 from a revised 112.1 in May (was 111.9). June consumer confidence dipped a touch to -2 from -1, as expected. June CPI flash estimate was flat at 1.9%yr, as expected.

UK May net consumer credit bounced back a little to £0.84bn from its ten-year low of £0.45bn in Apr. Higher interest rates are having a large impact on credit demand. June GfK consumer confidence also slipped a notch to -3 from its twoyear high of -2 in May. May mortgage lending unexpectedly fell slightly to £8.7bn from £8.76bn. The data is consistent with slower house price growth in 2007H2.

UK Q1 business investment was revised up to -0.6% from -1.3%. The quarterly weakness came from the manufacturing sector.

UK Q1 GDP was unrevised at 0.7% (annual rate revised to 3.0% from 2.9%).

UK Q1 current account deficit narrowed to £12.2bn, but the annual level took a hit from a revision to the Q4 deficit from £12.6bn to a hefty £14.46bn. The deficit with EU countries widened, while that with non-EU countries narrowed.

Canada Apr GDP was unchanged in Apr, whereas a small increase had been expected. The month was dragged down by weak wholesale trade, vehicle production and oil and gas exploration.