Risk appetite elevated but no panic in FX

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Risk appetite elevated but no panic in FX. Asia’s jittery tone carried through to the London morning, keeping risk aversion elevated until some calm emerged in NY, partly aided by better US data. This saw AUD, NZD and EUR recover from their lows vs USD, though in the euro’s case, not by much. The upside surprise on the Aug Empire State manufacturing index was followed by Treasury’s TIC data for June, which showed a staggering $101bn net inflow to T-notes and bonds, as foreign investors joined the record auctions with enthusiasm. Equities also attracted $19bn. But US equities had a rough day, sinking at the open and staying there into the final hour, SPX -2.3%. Basic materials and financials were the weakest SPX sectors, health care near-flat as President Obama’s reform proposal appears likely to be scaled back.

FX movements overall weren’t as dramatic as in equity markets, DXY only modestly stronger by late NY. EUR/USD dropped from 1.4125 in the European morning and touched lows dating to 30 July, at 1.4045 before grinding back to 1.4080. USD/JPY comfortably retained its 94 handle though with a broadly soft tone. 10-year T-notes rallied about 5bp to 3.47% while Comex copper’s -2.6% was less dramatic than Shanghai’s -4.8%.

AUD/USD lost about 50 pips in the London morning to 0.8156 but was back to 0.8220 in the NY afternoon.

NZD/USD exited local trade in the high 0.66s and was back there by early this morning, via a 0.6644 low.

US NY Fed factory index rose from -0.6 to 12.1 in August, well ahead of market expectations. The improvement was across nearly all measures, including a substantial bounce in number of employees and average workweek (though both remain slightly negative). This survey can be erratic, but is consistent with the general picture of improvement in the US manufacturing sector that is clearly emerging.

US NAHB homebuilders’ sentiment rose 1 point to 18 in August. The sales index was steady at 16, while expected future sales rose from 26 to 30 and prospective buyer traffic rose 3 points to 16. While the survey has been lifted in recent months by the pickup in housing starts and new home sales, it remains mired at the very low levels seen through most of 2008, prior to the Lehmans collapse.

US TIC data showed that foreigners bought a net $90.7bn of long-term assets in June, including $101bn of Treasuries as the size of the auctions was increased. China sold a net $25bn of Treasuries during the month, but there was more than adequate demand from elsewhere, particularly the UK (often seen as a proxy for OPEC countries).

The Fed Senior Loan Officer Survey found that demand for all loan types except for prime mortgages fell in the three months to July, though at a slower pace than in the April survey. Banks continued to tighten lending standards, but again at a slower pace than three months earlier.

Japanese Q2 GDP rose 0.9%qtr, 3.7%saar, -6.5%yr. The major contributors to expenditure growth in the quarter were net exports at +1.3ppt; personal consumption at +0.5ppt; public investment at +0.4ppt; and the statistical discrepancy at +0.3ppt. Private investment (-0.6ppt), dwelling investment (-0.3ppt) and private inventories (-0.5ppt) were all major drags on growth.

The Eurozone trade surplus of €1.0bn in June was little changed from May. Exports fell 0.1% and import values were flat, although higher oil prices suggests that import volumes continued to fall.

Outlook

NZD/USD resilience in the face of equity jitters tells us that the medium term uptrend is still intact. We thus retain our upward bias on NZD/USD near term as global data momentum still remains favourable for commodity currencies multi-day.