Opinion: NZ$ rises as emerging 'green shoots' encourage risk taking

By Danica Hampton Despite the commentary from the RBNZ earlier in the week, and contrary to the themes seen in broader currency markets, NZD/USD pushed higher last night. Overnight, all the focus was on the Swiss National Bank (SNB) and its alleged currency intervention. While the SNB has not confirmed intervention took place, the market participants suggest the SNB sold EUR/CHF aggressively. EUR/CHF rose sharply from below 1.5020 to nearly 1.5150 and USD/CHF climbed steadily higher throughout the night. While EUR/CHF demand saw EUR/USD push up towards 1.4000, aggressive selling from Asian accounts (though to be related to 1.3800-1.4000 option structures) saw EUR/USD knocked sharply lower through the NY session. The USD was the obvious beneficiary of the CHF and EUR weakness. Despite the generally firmer USD, NZD/USD still managed to climb to nearly 0.6450. It seems that growth sensitive currencies like NZD were underpinned by hopes the global economy is road to recovery. Not only did the World Bank upgrade the growth outlook for China (it's 2009 GDP pick has been revised to 7.2% from 6.5%), but the US data (the Philadelphia Fed manufacturing index and Conference Board leading indicator) tended to surprise on the upside. All in all, with little on the local calendar, this week's fortunes of the NZD/USD have tended to be driven by global sentiment. However, next week is a bit fuller in terms of NZ economic news. Q1 GDP is released next Friday (we are looking for -0.7%q/q) and ahead of that we'll have migration, spending, current account and consumer confidence readings to consider through the week. For today, we expect bounces to be limited to the 0.6280-0.6300 region. On the topside, we'd sellers are expected to emerge on bounces towards 0.6450. The USD pushed higher against most major currencies last night, as market participants digested the mix of currency intervention and improving global data. Swiss National Bank (SNB) intervention was the main talking point in currency markets last night. The SNB reportedly bought EUR/CHF in volume and EUR/CHF jumped from under 1.5020 to nearly 1.5150 and USD/CHF climbed from below 1.0780 to above 1.0880. SNB Chairman Roth said he would continue to stop an irrational rise in the Swiss Franc, but he has not officially confirmed that intervention took place. Meantime, SNB Vice-Chairman Hildebrand warned that "Swiss and International financial systems remain vulnerable". While clearly not taking the same view as the SNB, the Bank of Canada Governor Carney also talked about intervention last night. Carney said currency intervention is an option that exists, but it is "rarely effective in the long term". Carney also warned against complacency over green shoots, reaffirming that the Bank of Canada will keep rates at 0.25% for the next year and this tended to weigh on CAD. Elsewhere in the world, the focus was on the improving global economy. In the US, there was fresh evidence of "green shoots". The Philadelphia Fed manufacturing index rose to -2.2 in June, well above the -17.0% forecast and the -22.6 level seen in May. While the Conference Board leading indicator rose to 1.2% in May "“ the largest monthly increase seen in May in over five years. Meantime, the World Bank upgraded the growth outlook for China. In a quarterly update, the World Bank raised its forecast for GDP in 2009 to 7.2%, up from the 6.5% it projected in March. It said that massive policy stimulus was likely to underpin Chinese activity this year, but a robust recovery was unlikely given the weakness still seen around the world. Solid EUR/CHF demand (related to the rumoured SNB intervention) saw EUR/USD push up towards 1.4000. However, aggressive selling of EUR/USD from Asian accounts (though to be related to 1.3800-1.4000 option structures) saw EUR/USD knocked sharply lower through the NY session. Indeed, the 1.3800-1.4000 range looks likely to continue to contain the currency near-term. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.