It's crunch time for U.S. debt negotiations

Divergent economic performance in Oceania

Kiwi has remained in flight despite U.S. and Euro-zone debt concerns which have grounded most other beta currencies – NZD/USD posted fresh multi-decade highs just above the 0.8500 figure this week. In fact, weekly returns suggest the Kiwi may have accepted an invitation to attend the ‘safe haven’ party as NZD, JPY, and CHF have all experienced weekly gains of +0.84%, +1.99, and +2.54% against the buck. Unfortunately, Aussie was not invited to the party as both internal and external risks sent AUD more than -1.00% lower versus the greenback on the week. The inverse domestic currency returns between the Oceanic neighbors this past week reflects the diverging paths that their respective economies have taken.

Australia’s economic recovery seems to have hit a roadblock - both consumer and business confidence indicators have turned lower in recent months, retail sales declined -0.6% in May vs. an expected rise of about +0.3%, and Building Approvals plummeted -7.9% in May. Expectations for firm domestic consumption, a key component to a sustained post-disaster recovery, have sharply declined dragging expectations for RBA hikes down with it. On Friday, Westpac reversed its prior forecast for RBA tightening and is now calling for four rate cuts in 2012.

New Zealand’s economic recovery, however, seems to be picking up steam. The delayed Q1 GDP release printed much better than expectations at +0.8% q/q and +1.4% y/y, quite an encouraging sign considering Christchurch was struck by another earthquake just in February. Even more encouraging, however, are the details of the latest GDP report which show a +3.6% q/q contribution from the manufacturing sector suggesting earthquake related economic costs were overestimated. A direct result of the surprise boost to NZ Q1 GDP has been a concurrent boost for RBNZ rate expectations fueling NZD’s continued upside flight trajectory.

In FX, diverging rate expectations have sent AUD on a free-fall against NZD since posting multi-year highs around 1.3795/00 on March 7th – AUD/NZD has declined about -5.00% over the last 3 months. The release of the RBA’s JUL Minutes (Monday, 21:30 ET) is the main event for Australia next week and is likely to see Governor Stevens & company maintain a cautious tone as domestic conditions continue to deteriorate. New Zealand’s main data release is the release of 2Q CPI (Sunday, 18:45 ET) which may be NZD supportive if consumer prices follow the path of food prices – June food prices increased +1.4% versus a +0.5% rise in May. The technical picture also suggests medium term AUD/NZD weakness could be in store as the pair has broken below the trend-line for the primary uptrend from the October 2008 lows. A retest of the trend-line would come in around the 1.2900/1.3000 zone and may present opportunities to jump on board Kiwi’s resilient flight higher.

Key data and events to watch next week

Unites States: Monday – May TIC Flows, July NAHB Housing Market Index Tuesday – June Housing Starts and Building Permits, Fed’s Hoenig speaks Wednesday – Weekly MBA Mortgage Applications, June Existing Home Sales, Fed’s Sack speaks Thursday – Weekly Initial and Continuing Jobless claims, Bernanke testimony, May House Price Index, June Leading Indicators, July Philadelphia Fed

Euro-zone: Monday – EU Foreign Ministers Meet Tuesday – EZ May Construction Output, German and EZ July ZEW Surveys Wednesday – German Producer Prices, EZ July Consumer Confidence Thursday – EZ, German and France July Manufacturing and Services PMI’s, May EZ Current Account Friday – French July Business Confidence Indicator, German July IFO, EZ May Industrial New Orders
United Kingdom: Wednesday – BoE Meeting Minutes, June Nationwide Consumer Confidence Thursday – June Public Finances, June Retail Sales

Japan: Tuesday – June Department Store Sales Wednesday – May Coincident and Leading Index, June Convenience Store Sales, BoJ Deputy Governor Yamaguchi speaks Thursday – June Merchandise Trade figures, May All Industry Activity Index Friday – June Supermarket Sales

Canada: Monday – May International Securities Transactions Tuesday – June Leading Indicators, BoC Interest rate decision Wednesday – May Wholesale Sales Thursday – BoC Monetary Policy Report Friday – June CPI, May Retail Sales

Australia & New Zealand: Monday – NZ 2Q CPI, AU June New Motor Vehicle Sales Tuesday – RBA’s July Meeting Minutes Wednesday – AU May Westpac Leading Index, AU July DEWR Skilled Vacancies Thursday – NZ June Net Migration, AU 2Q Business Confidence, AU June RBA Foreign Exchange Transactions, NZ June Credit Card spending Friday – AU 2Q Import and Export Price Index

China: Wednesday – July Leading Economic Index Thursday – July HSBC Flash Manufacturing PMI.

Brian Dolan is chief currency strategist at

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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