Canadian And New Zealand Dollars Get Whacked, While Greenback Consolidates

The US dollar has been mostly confined to about a 30 pip range against the euro and yen in Asia and Europe this morning. Sterling is under a little pressure after a series of poor data, including larger than expected falls in manufacturing and construction output, and a sharp widening of the trade deficit. However, here too ranges are narrow as the outcome of the Bank of England meeting is awaited.  

The New Zealand and Canadian dollars are stealing the foreign exchange show today. The New Zealand dollar sold off hard after the central bank softened its inflation forecast and discouraging speculation in the market of a rate hike. Officials played up the downside risks. The Kiwi was sold to fresh lows since last June. It is off 1.3%, the most since the US election last November. A break of $0.6800 could spur a move toward $0.6650.  

The Canadian dollar was spanked after Moody’s downgraded six banks amid concern about exposure to an overstretched consumer. The Canadian dollar had staged a recovery in North America yesterday and finished the session near the lower end of its recent range (~CAD1.3640). Recall that since April 18, the Canadian dollar has fallen in all but three sessions. The news initially hit thin markets, and the US dollar quickly spiked toward the week’s high near CAD1.3750. The US dollar has drifted lower and in the European morning eased toward CAD1.3700.  

Japan reported a larger than expected current account surplus for March. The JPY2.9 trillion surplus was the second largest since 1996. One of the most important characteristics of Japan’s current account surplus, which is not always understood, is that it does not primarily stem from the trade. Japan recorded a trade surplus on the balance of payments basis of JPY866 bln. Instead, the driver of Japan’s current account surplus is from the primary income account.  

Primary income includes coupons, dividends, and profits from overseas investments. A weak yen flatters the value of its overseas earnings, which in turn boost the current account. Due to different competitive strategies, and a host of other considerations, a weak yen, as Japan has experienced, does not necessarily translate into greater net exports.