Market Drivers for July 24 2014

RBNZ says halt for now

EZ PMIs mixed but Germany surprises up, UK Retail Sales miss

Nikkei -0.29% Europe 0.39%

Oil $102/bbl

Gold $1299/oz.

Europe and Asia:

NZD RBNZ hikes and then halts

EZ PMI Manufacturing 51.9 vs. 52

EZ PMI Services 54.4 vs. 52.7

GBP Retail Sales 0.1% vs. 0.2%

North America:

USD Jobless claims 8:30

USD New Homes Sales 10:00

Its been a very active night of trade in currency market with multiple economic releases affecting G-10 pairs in their own unique way. In Asia, the RBNZ hikes the benchmark rate as expected by 25bp raising it to 3.50%, but at the same time suggested that it will halt any further tightening for the time being.

In a tightly worded statement the RBNZ noted that the NZD was unsustainable at these levels – language that some market players interpreted as a possible threat that the central bank may eventually intervene in the market it the kiwi does not ease off the current levels. The RBNZ also noted that inflation pressures were easing with wage growth subdued and housing price inflation slowing.

Overall the RBNZ statement was as dovish as possible and clearly intended to drive down the exchange rate of NZD/USD despite the rate hike. The key question going forward is whether this an actual halt to the tightening cycle or merely a pause. In either case the conventional wisdom is that the RBNZ will not move on rate until March of 2015 and that is likely to put some downward pressure on the unit as speculative flows begin to seep out.

The kiwi tumbled in the aftermath of the release dropping below the 8600 level but has steadied underneath that figure. Over the next several days the shorts are likely to press their case and test support at the key 8500 level.

In Europe meanwhile, the flash PMI data was mixed with France once again disappointing the market with reading of 47.6 versus 48.5 on the manufacturing side. On the other hand the services surprised to the upside rising to 50.4 from 48.9 expected. In Germany both components did better than forecast with services especially strong at 54.4 versus 52.7, Part of the gain may have been due to the World Cup interest which no doubt helped the retail sector this month.

The surprisingly strong PMI readings which so far show no serious fallout from the geopolitical tensions in the region, helped boost the euro which popped back above the 1.3450 level to hit a high of 1.3480. The pair remains in strong downtrend, but may have reached a bottom for the week, especially if tomorrow’s IFO report does not disappoint and kicks in a short covering rally that takes the pair above the 1.3500 mark.

Finally in UK the Retail Sales numbers missed their mark printing at 0.1% versus 0.2% eyed with large declines in clothing affecting the headline number. Although the series is notoriously volatile and may have been impacted by the World Cup, the data on the consumption front shows that demand is far from overheating and therefore is yet another argument for BoE to remain accomodative for the time being.

Cable dropped on the news, but remains above the key 1.7000 level, although it may be tested in North America trade. The US calendar is relatively light with only jobless claims and New Home sales on the docket, but the data points surprise to the upside they may provide a small amount of fuel for USD/JPY which has been consolidating around the 101.50 level and could make a push towards 102.00 if US data continues to show positive momentum.

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