Opinion: NZ$ to firm through 2009 after confidence boost

By Danica Hampton NZD/USD has pushed higher over the past 24 hours, climbing from below 0.7150 to above 0.7250. NZD sentiment was bolstered by yesterday's National Bank Business Opinion survey, which provided further confirmation that the NZ economy is on the mend. Not only did business confidence rise to its highest level since April 1999, but "own activity" expectations rose to their highest since March 2005. This is consistent with annual GDP growth pushing up to near 3% by this time next year. With NZ growth likely to accelerate well into next year, we expect NZD/USD to trend higher over coming quarters. Indeed, anything more than a short-term currency correction seems unlikely. Overnight, dramatic moves in EUR/CHF and USD/CHF reeked of Swiss National Bank (SNB) intervention. While the SNB wouldn't confirm whether or not it actually intervened to weaken the CHF, the sharp spike higher in USD/CHF paved the way for a bout of USD strength. While EUR/USD and GBP/USD all skidded lower, both AUD/USD and NZD/USD proved to be remarkably resilient. Commodity prices rose strongly last night. Crude oil prices rose to above US$70/barrel, gold prices climbed above US$1,000/oz and the CRB Index (a broad measure of commodity prices) has finished the night up 2.5%. Not only did strong gains in commodity prices help underpin currencies like NZD, AUD and CAD. But strong demand at the London fix (thought to be related to month-end portfolio rebalancing) also provided a prop for both AUD and NZD. The global outlook will be key to the fortunes of the NZD near-term. Investors have become quite optimistic on the global outlook over recent months. However, should the upcoming data disappoint (today we have Japan's Tankan and manufacturing PMIs released in China, Europe and the US) we may well see a short-term correction in global equities and risk sensitive currencies like NZD. For today, expect bounces in NZD/USD to be limited to 0.7250-0.7275. Initial support is eyed around 0.7140. The USD finished the night weaker against most major currencies. Markets shrugged off the mixed US data, instead the focus was on month-end flows and rumoured Swiss National Bank intervention. Early in the night, chatter about month-end flows tended to dominate. Steady selling of EUR/GBP was noted and USD sentiment was weighed down by comments from Fed officials. Lockhart said it would be some time before the Fed implemented exit strategies. Kohn said "restraints on credit are likely to constrain the speed of recovery". However, everything was shaken up by rumoured action from the Swiss National Bank (SNB) to weaken the CHF. EUR/CHF spiked from 1.5080 to above 1.5200 and USD/CHF surged nearly 1.5% from 1.0280 to 1.0450. The SNB has declined to comment on whether it intervened last night. However, at its latest meeting a fortnight ago, the SNB pledged to use all its policy tools "“ including intervention to weaken the CHF- in order to boost the economy and fight deflation risks. The alleged SNB action produced a brief patch of USD strength. EUR/USD fell about a cent from around 1.4680 to nearly 1.4580. GBP/USD skidded from above 1.6100 to below 1.5950. Last night's US data was a little mixed. On the positive side, Q2 GDP confirmed that the US economy contracted at an annualised pace of just 0.7%, well above forecasts of -1.2%. However, both the ADP employment index and the Chicago PMI disappointed. The ADP employment index suggests that jobs fell by 254,000 in September (worse than 200,000 forecast) and this suggests some downside risks to Friday's US non-farm payrolls release. Meantime, the Chicago PMI fell to 46.1 in September, below last month's 50.0 outturn and the 52.0 forecast. While the USD weakened last night, we're not convinced this negative USD sentiment will necessarily persist near-term. With global equities rebounding some 50% from the lows seen in March, and many equity indices now looking stretched relative to valuations, investors are becoming less tolerant of softer-than-expected economic data. If this week's economic news fails to justify the upbeat global outlook currently priced into markets, look out for a correction across global equities and a recovery in the USD. We expect the USD Index will find solid support on dips towards 75.90-76.00, and suspect bounces in EUR/USD will be limited to 1.4700-1.4720 near-term. Today, keep an eye out for Japan's Tankan Survey (12:50pm) and China's PMI (2:00pm). Tonight's EU Commission PMIs and the US manufacturing ISM will provide an update on global manufacturing sector. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.