Opinion: NZ$ dribbles lower on Dubai responsibility talk; waits for RBA decision

Nevertheless, the NZD managed to find some support from across the Tasman as the AUD gained on the back of speculation the RBA will hike rates at today's meeting. Noted RBA watcher Terry McCrann said the "no-regrets" option for the RBA is to hike 25bps, in part because the RBA Board does not meet again until February. Market pricing is currently consistent with around a 70% chance of a 25bps hike, up from just a 40% chance at the end of last week. At the margin, demand for the NZD may also have been boosted by yesterday's upbeat building consents data. Residential consent numbers bounded a seasonally adjusted 11% in October, to be about 20% higher than a year ago. It was the overdue catch-up we had long been looking for and supports our view a pick-up in home-building activity is well underway. The focus for markets today will be on the RBA's interest rate decision at 4:30pm (NZT). Markets are also sensitive to further developments in Dubai, given the debt restructuring plan there is still unclear. The results from Fonterra's latest milk price auction will also be released tonight. If the RBA does hike at its meeting today (as our Australian colleagues suggest they will), expect further gains in the AUD, which could see the NZD/USD push up towards 0.7200. Movements in currency markets have been a little mixed over the past 24 hours. Most of the major currencies have traded choppily in familiar ranges. Market sentiment was cheered yesterday by several announcements of support for Dubai, which helped ease fears about wider contagion effects. An article in the UK's Sunday Times suggested Abu Dhabi is putting together a rescue package for Dubai. And the UAE's Central Bank said it 'stands behind local and foreign banks' and will make extra liquidity available. Asian stocks rose sharply on the news. The Nikkei increased 2.9% and the Shanghai index was up over 3%. As risk aversion eased off its highs, demand for the USD as a "safe-haven" fell back and the EUR/USD headed back above 1.5050. But concerns over Dubai did not disappear completely. Later in the night, comments from the Director General of Dubai's department of finance said the Dubai government will not guarantee Dubai World's debts and creditors need to "take part of the responsibility". Ratings agency Moody's said the restructuring could lead to downgrades of UAE banks' financial strength ratings. Combined with a lacklustre night in stock markets (the S&P500 is down around 0.2%), this saw risk appetite again come under pressure, and the USD pared some of its earlier losses. The JPY spent the night drifting higher amid more conflicting reports about currency intervention. National Strategy Minister Kan said the government would try to slow the JPY's rise. In contrast, weekend reports quoted Finance Minister Fuji as saying he would not intervene, but Fuji later went on to clarify his remarks saying intervention was not impossible. It was a fairly miserable night for the GBP. More evidence the UK economy is struggling saw GBP/USD slide from nearly 1.6600 to below 1.6450. The November GfK consumer confidence` survey fell to -17, against expectations of an increase to -11. Money growth data remained firmly negative in annualised terms, and the CBI service sector survey showed a fall in the volume of business in the three months to November. Looking ahead, there is plenty event risk to watch out for tonight. The RBA board is due to meet, with markets pricing a better than even chance of another 25bps rate rise. On the data front, Manufacturing PMIs for the UK, Europe and China will be released, along with the all-important US ISM manufacturing survey. All up, we suspect the still generally risk averse environment will keep the USD index well supported on any dips towards 74.50. Initial resistance is eyed around 75.50. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.