Renewed risk aversion from abroad is responsible for today’s broad-based US dollar gains, especially after the latest US data showed declining consumer confidence, manufacturing output, and house prices.
This morning's US economic reports validated last week’s Federal Reserve decision to delay tapering of asset purchases. According to the Conference Board, consumer confidence declined in the month of September, which was consistent with the drop reported by the University of Michigan survey last Friday. Clearly, consumers are feeling nervous about the outlook for the US economy, the fiscal showdown in Washington, and the rise in borrowing costs.
Manufacturing conditions in the Richmond region are also stagnating this month after expanding strongly in August, raising concerns about the sustainability of the sector's recovery.
The Fed's highly touted housing market recovery is now looking vulnerable as well, with the S&P Case-Shiller house price report indicating a slower pace of growth in July, but thankfully, this weaker release was offset by the Federal Housing Finance Agency's report that house prices rose at the strongest pace in March.
Despite these disappointments, however, the US dollar (USD) is trading higher against all major currencies except for the Japanese yen (JPY) as new risk aversion hits the markets.
A Disappointing Reaction to Canadian Retail Sales
Earlier this morning, the Canadian dollar (CAD) shrugged off better-than-expected retail sales numbers. Consumer spending rose 0.6% in Canada in the month of July, erasing entirely the previous month's decline. Excluding autos, retail sales rose 1.0%, a much-needed recovery after the 0.9% contraction in spending the prior month.
Unfortunately, CAD gains were limited because the details of the report show that a large part of the increase was due to higher gasoline prices. Consumers spent more on clothing and general merchandise, but less on electronics, and food and beverage.
In other words, the improvements were not broadly based, but nonetheless, the recent pick-up in job growth and today's increase in spending should make next move by the Bank of Canada (BoC) a rate hike, not a rate cut.
The Recent Leader That’s Now Today’s Biggest Loser
Of all the major currencies, the New Zealand dollar (NZD) is experiencing the steepest losses after Fonterra—New Zealand’s largest dairy producer—said earnings in the second half of the year would be significantly lower. Analysts credit the grim forecast to last summer's drought and weaker growth in Australia.
However, it is also important to note that Fonterra raised its milk forecast for next year by 50 cents to a record high of $8.30 per kilogram of milk solids. According to the company’s chairman, higher prices "reflected continuing strong international dairy prices, particularly for whole milk powder driven by demand from Asia, and especially China."
The company still expects to pay a dividend of 32 cents in 2014, so while Fonterra is not as optimistic about the outlook for the second half of this year, the combination of higher milk prices, strong demand from Asia, and a steady dividend tells us that one of the greatest risks for the country (i.e. slower Chinese demand) is less of a concern, which will eventually have a positive impact on some of New Zealand's other large exporters. Therefore, we expect the losses in the NZDUSD and gains in AUDNZD to be limited.
By Kathy Lien of BK Asset Management