Opinion: NZ$ to fall if current account deficit 'well south' of expected improvement

By Mike Jones NZD/USD trickled lower overnight, largely thanks to a generally stronger USD. Currency markets struggled a bit for direction overnight. But with the all important FOMC and G20 meetings scheduled for later this week, position squaring was generally the order of the day. Most notably, the squaring up of short USD positions resulted in broad-based USD strength. Markets are a little wary policy makers' discussion of stimulus exit strategies could dent demand for "˜riskier' assets and boost demand for the USD. Modest losses across global equities and sharp falls in commodity prices added to the weight on "˜growth sensitive' currencies like NZD, AUD and CAD. The CRB index has fallen more than 2% over the past 24 hours. However, with the weakness centred more on "˜hard' commodities and oil, the NZD (which is not as exposed to prices for these commodities) performed better than most. Indeed, NZD/AUD is back up to around 0.8200. NZD/GBP also performed strongly overnight, flirting with recent highs around 0.4370. GBP has been the worst performing currency over the past month, hit by ongoing banking sector concerns and sharp falls in interest rates. But it should be noted that, barring further meltdown in the UK banking sector, we can't see a compelling reason for the NZD to continue to outperform GBP. We're looking for a NZD/GBP correction back towards 0.4000 in coming weeks. Nonetheless, given upward momentum looks to be firmly entrenched for now, we may well see further NZD/GBP gains first. Today brings the first of this week's heavy duty data releases in the form of Q2 balance of payments and Westpac consumer confidence. Our economists think the annual current account balance will improve to around -6.7% of GDP, a touch better than the -7.1% the market is looking for. We suspect it will take a result well south of this to have a significant impact on the NZD. For today, we expect sellers to emerge on NZD/USD bounces towards 0.7100. The US dollar strengthened against all of the major currencies last night. With no major data or events overnight it is difficult to pinpoint the exact catalyst for the move. However, with the potentially important FOMC and G20 meetings later in the week, it seems market participants were keen to take profit on recent strong gains in some of the majors. EUR, AUD and JPY all continued to ease from recent highs. Markets are nervous that policy makers will seek an early exit from various fiscal and/or monetary stimulus measures (boosting demand for the USD), and this has tended to weigh on risk appetite in recent sessions. The VIX index (an indicator of risk aversion) rose as high as 25.5% at one point during the night, having touched on one-year lows in the middle of last week. US and European stocks posted small losses which added to the generally dour mood. The S&P500 index is currently down around 0.3%, while the FTSE and DAX have both fallen 0.6-0.8%. Waning appetite for risk also took a toll on commodity prices. The CRB index (a broad index of commodity prices) fell by over 2%. Oil prices are down around 3.5% to US$69 a barrel, on concerns about the outlook for global demand and the rising USD. Falls in equity markets and an easing in risk appetite saw traders unwind short positions in the USD, spurring falls in most of the majors. This was despite comments from the Russian Deputy Prime Minister outlining Russia's strategy to diversify some its reserves away from the USD. Given the sharp falls in commodity prices, commodity-linked currencies tended to underperform overnight. USD/CAD rose nearly 1% to 1.08, while AUD and NZD were down 0.4-0.6%. Sentiment towards the GBP wasn't helped by a Bank of England article (published in their Quarterly Bulletin) which said the long-run sustainable exchange rate may have fallen due to an increased focus on the UK's economic imbalances. The report tended to overshadow UK house prices data which showed a small gain in prices in September. For today, the data calendar again looks very light. While negative USD sentiment may well reassert itself at some point, markets seem likely to remain cautious heading into the FOMC and G20 meetings later in the week. As such, we suspect dips in the USD Index will be limited to the previous low of 76.10 in the short-term. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.