Opinion: NZ$ overdue for consolidation

By BNZ Currency Strategist Danica Hampton The NZD/USD rebounded last night, underpinned by a generally weaker USD and profit-taking on short NZD positions. The USD slipped last night as renewed concerns about the health of the US financial sector weighed on both US stocks and US interest rates. US 2-year government bond yields fell 5bps last night to 2.32% and are now 20bps lower than this time last week. The downward pressure on US interest rates has seen NZ-US interest rate spreads widen and this has provided a bit of a prop for NZD/USD. While the weaker USD helped underpin NZD/USD, solid demand for NZD crosses also provided support. Over the past few days, a variety of real-money and macro accounts have shown a solid appetite for NZD against the crosses. We suspect this demand reflects a paring back of short NZD positions and a reassessment of RBNZ easing expectations following the sharp decline in the TWI. Over the past 24 hours, NZD/AUD has climbed from just above 0.8100 to nearly 0.8200 and NZD/USD has rebounded from below 0.7050 to above 0.7150. Looking ahead, we still think the RBNZ is on track to cut interest rates 25bps in September, which combined a sharp slow-down in NZ growth and a generally firmer USD should see the NZD/USD trend lower over coming months. However, given the speed and magnitude of the recent decline, the NZD/USD is looking overdue for a bit of consolidation. For today, we suspect bounces towards 0.7160 will limit the topside and initial support is seen ahead of 0.7035. Keep an eye out for NZ PPI data (due at 10:45am), market forecasts are centred on 2% for both inputs and outputs, but this release is unlikely to be a big market mover given we already have Q2 CPI. Across the Tasman, the RBA minutes (due 1:30pm NZ time) will be watched for clues on how close the RBA is cutting rates. The Majors The USD slipped against most of the major currencies last night, as investors used the slide in US stocks as an excuse to take profits on long USD positions. US stock markets tumbled last night amid renewed concern about the US financial sector. Shares in troubled US mortgage agencies Fannie Mae and Freddie Mac fell 18% after a Barron's report suggested the US Treasury may recapitalise the companies, a move that may wipe out shareholders’ equity. Lehmans’ stock price fell 4% after the Wall Street Journal reported that analysts are bracing for a Q3 loss of at least US$1.8b. News that the NAHB Housing Market Index stabilised at a record low level of 16 in August did little to bolster sentiment. The combination of weak US stocks (S&P500 currently down 1.5%) and soft US interest rates (2-year government bond yield slid 5bps to 2.34%) took a toll on the USD. EUR/USD rebounded from below 1.4650 to nearly 1.4750 and USD/JPY slipped from above 110.50 to below 110.00. Despite the weaker USD, GBP/USD remained heavy weighed down by concern the UK may be headed for recession. Rightmove house prices did little to lift sentiment, showing that UK house prices fell 4.8%y/y in August. Investors are now waiting for Wednesday’s Bank of England minutes for a gauge of whether the central bank is likely to cut interest rates before the year is out. More generally, we’re inclined to view the recent USD weakness as a bit of profit-taking after the strong climb seen over recent weeks. The USD index has climbed more than 8% off the 71.30 low seen on July 15 and is currently sitting around 77.00 just a shade below the year-to-date high of 77.35. Looking ahead, we continue to think the medium-term trend in the USD is higher. While the US economy is starting to stabilise, it’s become evident that growth in other economies is now slowing. Last week, data in both Japan and the Eurozone showed that growth contracted in Q2 and the British Chamber of Commerce is now looking for the UK economy to head into recession. The BoJ is expected to downgrade its view of the Japanese economy, while keeping its key interest rate at 0.5%, when its two-day meeting concludes later today. Meanwhile, this week’s European data (German ZEW on Tuesday, EZ PMI data on Thursday and EZ Industrial Orders on Friday) should provide clues on how growth in Q3 is shaping up in the Eurozone. As further evidence of slowing Eurozone, UK and Japanese growth comes to hand this should help keep the USD buoyant. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.