The USD stands lower this morning against all G10 currencies, on the back of remarkably weak US durable goods orders. The EUR was a key beneficiary, up as much as 1.6% for the day, before paring those gains to sit at 1.1360.

Core durable goods orders (ex-transportation) fell by 0.8% m/m in December, against expectations for 0.6% rise. There were also downward revisions to prior months. Business investment was also weak, with shipments falling 0.2% m/m (+1.0 exp.) and orders down 0.6% (+0.9 exp.). There were downward revisions here, too.

This genuine weakness was the major driver of market sentiment, seeing the USD, equities, and bond yields sharply lower. The S&P 500 is 1.2% weaker for the day, having recovered somewhat from its depths after other USD data were better than expected. US new home sales rose by 11.6% m/m (+2.7% exp), and consumer confidence rose to 102.9 (95.5 exp), a fresh 7-year high.

It is remarkable how much impact this single weak report has had. The broad Bloomberg Dollar Spot Index was 1.0% lower for the day, taking back a sizeable chunk of last week’s 2.4% gain. Note that GBP/USD managed to post a 0.9% gain despite UK Q4 GDP surprising on the downside (+2.6% y/y vs +2.7% exp).

This sharp reaction says much about market positioning. The long USD camp has continued to grow (for good reason), but some of the weaker followers are susceptible to being shaken out easily. Signs of a more cautious Fed at tomorrow morning’s FOMC statement would cause even more of them to run.

We note that some of the S&P 500’s losses overnight stem from currency headwinds. Procter & Gamble reported that a rising USD ate into its earnings. Other results are also shed some light on how volatility in other financial markets are impacting corporates. Caterpillar, an industrial bellwether, said that lower oil prices had affected sales to energy companies. While hiccups in corporate America are unlikely to give the Fed reason to pause just yet, it will be a growing source of concern as the USD rally continues.

The AUD sits at the bottom end of the G10 leader-board, and will continue to struggle on a relative basis ahead of the inflation report this afternoon, and even the RBA next week. This is despite a good bounce in metals prices overnight, where gold rose by 1.1% and the LMEX index is up 1.7%.

Coming Up

There is a trifecta of major releases over the coming 24 hours that will keep local investors on their toes.

Australia’s Q4 inflation report is due this morning. The market expects headline inflation to fall to +0.3% q/q from +0.5% in Q3. NAB expects a softer result still, picking -0.1% on the back of much lower petrol prices. Such a result will fuel speculation that the RBA will next week soften the ground for a rate cut in March.

Tomorrow morning, the Fed will release its policy missive for January. Our centrl scenario is that the FOMC simply rolls out a statement largely unchanged from December, and forges toward rate hikes in mid-2015. Any upgraded notes of concern from the Fed about soft inflation, weakness in trading partners, or the stronger USD would likely be taken as a dovish signal.

An hour later, the RBNZ will release its one-page OCR Review. The market anticipates a big step toward a neutral bias (from the tightening bias signalled in December). We are less convinced the shift will be start, but agree that some watering-down of the tightening bias is likely.

Overnight

On global stock markets, the S&P 500 was -0.80%. Bond markets saw US 10-years +0.16bp to 1.83%. On commodity markets, Brent crude oil +2.50% to $49.34, gold was +1.1% to $1,294, iron ore -0.1% to $63.50.

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