Why the Kiwi dollar may drift up to 73 USc later in 2010

By Mike Jones*

The NZD has progressed to trade above the US 70cent level in the overnight session. Once again, now that last weeks RBNZ MPS is history, we are not the focus of the media and markets even if young Winston is the darling of the football media.

Stable equity markets and risk appetite ensured the NZD was well supported, though the thrust for the move higher came from Europe where sovereign debt auctions and data impressed. Once again global markets have spent the overnight session in a generally positive frame of mind. Across Europe and into Wall Street equity markets have held small gains, the same can be said for the CRB and oil prices, though the New York session has been less inspiring thanks to weaker US data updates.

Writing in yesterday’s “Strategist” our markets research team noted “the NZ dollar has been well and truly caught in the recent global turbulence, although hasn't broken ranks from the fundamental view we have adhered to.

Indeed, on our short-term valuations NZD still looks like it should recover a bit more, to more like 0.7100-0.7300. However, we fully acknowledge that global sentiment will remain most important to NZD fortunes over the coming weeks, with equity markets the obvious marker to this. We're still forecasting a gradual drift higher in the NZ dollar for the remainder of 2010, to 0.7300.

But we wouldn't be surprised to see it chopping around within a 0.6500-0.7300 range over the coming months as risk aversion ebbs and flows. We'd thus encourage folk to prepare for a potentially bumpier ride, albeit with good trading opportunities for the brave of heart”.

For today, interim support is lifted to the 0.6970/0.6990 level with resistance pegged closer to 0.7050/0.7070.

The end of the week is light on the calendar, time to catch up with the sweepstake picks for the weekend’s matches perhaps. Despite an Asian session yesterday that saw currencies under some pressure as traders focused on the concern and colour of some from the glass half full media and their commentary the London session was dominated by a sharp rally in the EUR. It ran quickly higher from the US 1.2250 level to US 1.2400 when results of the Spanish debt auction were published.

Spain’s offering of 10Y and 30Y debt was seen by many as a significant hurdle this week, however, both auctions witnessed good demand at rates that were not considered prohibitive for Spain.

The 10Y auction drawing a 1.89x bid to cover ration for EUR 3.0bio while the 30Y auction raised just short of EUR 0.5bio at a 2.45x ration.

Further encouragement for risk appetite came from an EU summit where all 27 EU members have agreed to bank stress tests, Merkel et al saying results will be published by July.

The EU move follows agitation from Spanish officials who have argued for such tests so that they could materially respond to weakening market sentiment and media speculation on the health of their banking sector. UK monthly retail sales impressed, printing at +0.6%, ahead of forecasts for a 0.1% gain.

The data gave GBP a lift on the day, though commentary from the BOE’s King still resonates in the background. Speaking earlier, King suggested that the economic slowdown may well curb inflation pressures and that the UK economy exhibits none of the traits normally associated with prolonged inflation.

The June 22 budget remains foremost a key event for the UK, traders and ratings agencies sitting nervously in anticipation.

Overnight media reports suggest further spending cuts of perhaps GBP10bio might come from the abolishment of project spends announced under the previous administration. In the US improved sentiment met headwinds, a very poor Philly Fed update putting a lid on equity and FX markets. The Philadelphia Fed’s Business Outlook slumped to 8.0 from a previous 21.4 and expectations of a 20.0 outcome.

A rise in weekly Jobless Claims numbers to 472,000 doing no favours and along with CPI readings which matched forecasts helped underpin a rally in US rates.

* Mike Jones is part of the BNZ research team. All its research is available here.