Opinion: NZ$ sentiment dented by new EU dairy aid

By Danica Hampton After hitting a fresh 13-month high above 0.7150 yesterday evening, the NZD/USD dribbled lower last night. Bank of Japan Governor Shirakawa said a stronger JPY might support the Japanese economy in the longer run. The comments provided a bit of support for JPY and encouraged a bout of profit-taking from investors who had bought NZD against JPY. NZD/JPY sank from around 65.20 to below 64.60 and this set the scene for a softer NZD/USD. At the margin, NZD sentiment may have also been dented by the potential increase in government aid for dairy producers elsewhere in the world. In the wake of heavy protests, the European Commission has announced it will change EU state aid rules to let member states pay each farmer up to €15,000 in aid to offset the effect of lower milk prices. Meantime, US producers are still awaiting Congressional approval on a $305m "cash for cheese" program. There wasn't a lot in the way of direction coming from global equities or the US data last night. European equities posted modest gains, but Wall Street has chalked up small losses. The US data was a bit mixed (housing starts and continuing jobless claims disappointed, while the Philadelphia Fed index surprised on the topside) and didn't really shed much light on outlook for the US economy. Undeniably, NZ fundamentals have improved over recent months. Not only is our risk appetite index now sitting back around its long-term average, but NZ-US interest rate spreads have widened and NZ commodity prices have recovered. Our short-term valuation model suggests a "˜fair value' range for the NZD/USD of 0.6850-0.7050. However, this also suggests there isn't a compelling fundamental reason to chase the NZD/USD higher from here. For today, with little direction coming from the global backdrop, we suspect profit-taking will see NZD/USD remain heavy as we head into the weekend. We suspect bounces will be limited to 0.7130-0.7140. Initial support is seen ahead of 0.7050-0.7060. The USD spent the night treading water within familiar ranges, as investors digested comments from the Bank of Japan, Swiss National Bank and a mis-mash of US data. The USD Index bounced about in a 76.00-76.50 range, while EUR/USD traded choppily between 1.4690-1.4760. Early in the night, the Bank of Japan (BoJ) Governor Shirakawa said that a stronger JPY might support the Japanese economy in the longer run. Shirakawa added that the BoJ would carefully monitor the impact the currency was having on the economy and said that exchange rates should be formed in a stable manner. The JPY supportive comments saw USD/JPY sink sharply to 90.60 and encouraged some profit-taking on short JPY cross positions like EUR/JPY and AUD/JPY. Miserable UK retail sales saw GBP/USD slide lower, from above 1.6560 to below 1.6440. Retail sales growth was flat for the month of August, which saw annual sales grow just 2.1%y/y (below the 2.7% forecast). As widely expected, the Swiss National Bank left its 3-month policy rate unchanged at 0.25% and reaffirmed its commitment to warding off deflation through the use of unconventional monetary policy measures (like bond purchases and currency intervention). When Chairman Roth was questioned about how long the SNB would continue to act to stop the CHF from rising, Roth responded "it would be too early to abandon the old strategy. We are not yet out of the woods." However, the lack of actual SNB intervention disappointed many market participants. USD/CHF slipped from above 1.0350 to a 14-month low of around 1.028. Global equity markets provided little in the way of direction for currencies. European indices posted small gains, but Wall Street zig-zagged in a tight range following a mix of US data. Housing starts rose just 1.5% to 598,000 in August, slightly slower-than-expected. Initial jobless claims dipped in the week-ending September 13, but continuing claims rose to 6,230,000 (well above 6,100,000 forecast). However, the Philadelphia Fed manufacturing index rose to 14.1 in September, well above the 8.0 forecast. The USD has weakened about 2½% on a trade-weighted basis since the start of last week. Reduced "safe-haven" demand, falling US bond yields and worries that Asian central banks may be diversifying reserves have weighed on the USD. Given the sharp USD weakness seen over recent days, some profit-taking looks likely as we head into the weekend. As such, we suspect the USD Index will find solid support ahead of 75.90-76.00 near-term. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.