This morning’s U.S. economic reports validate the Federal Reserve’s decision to wait to taper. 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. Consumers are feeling nervous about the outlook for the U.S. economy, the fiscal showdown in Washington and the rise in borrowing costs. The consumer confidence index dropped from 81.8 to 79.7. Manufacturing conditions in the Richmond region is also stagnating this month after expanding strongly in August, raising concerns about the sustainability of the sector’s recovery. The Fed’s much treasured housing market recovery is looking vulnerable with S&P Case Shiller reporting a slower pace of growth in July house prices but thankfully this weaker release was offset by the Federal Housing Finance Agency’s report that house prices rose at its strongest pace in March. Despite these disappointments, the U.S. dollar is trading higher against all of the major currencies this morning except for the Japanese Yen as risk aversion hits the markets.

Earlier this morning the Canadian dollar shrugged off this morning’s better than expected retail sales numbers. Consumer spending rose 0.6% in the month of July, erasing the previous month’s entire decline. Excluding autos, retail sales rose 1.0%, a much-needed recovery after the 0.9% contraction in spending the prior month. Unfortunately the 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, food and beverage. In other words, the improvements were not broadly based but nonetheless the recent pickup in job growth and today’s increase in spending should still make the Bank of Canada’s next move a rate hike and not rate cut.

Of all the major currencies, the New Zealand dollar is experiencing the steepest losses this morning after Fonterra said earnings in the second half of the year will be significantly lower. New Zealand is the world’s largest dairy exporter and Fonterra is the country’s largest dairy firm. Analysts credit the grim forecasts 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 milksolids. According to the Chairman, higher prices “reflected continuing strong international dairy prices, particularly for whole milk powder driven by demand from Asia, and especially China.” They still estimate to pay a dividend of 32 cents in 2014. So while Fonterra is not as optimistic about the outlook for the second half, the combination of higher milk prices, strong demand from Asia and a steady dividend tells us that one of the greatest risk for the country (slower Chinese demand) is less of a concern and therefore less of a risk for some of New Zealand’s largest exporters. Therefore we expected the losses in the NZD/USD and gains in AUD/NZD to be limited.

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