Opinion: NZ$ dragged below 72.5 USc as concerns mount over global economy, banks

By Mike Jones After rebounding on Monday night, the NZD has lost a little of its lustre over the past 24 hours. NZD/USD has fallen nearly 1.5% to 0.7250 "“ close to where it started the week. The NZD has traded choppily over the past week or so as investors have continued to weigh up the likely shape of the global economy in 2010. Selling pressure on the NZD began to mount yesterday afternoon. Rumours German bank WestLB needed more funding and concerns over bank capital levels raised by S&P put the heat on investors' risk appetite, denting demand for "˜growth-sensitive currencies like NZD and AUD. Overnight, choppy trading continued as markets assessed the impact of a slew of economic data. The German IFO business sentiment index and European industrial orders exceeded expectations, which buoyed sentiment initially. However, a mixed batch of US data subsequently clouded the picture a little. US consumer confidence was a bit better-than-expected, but the Richmond Fed index and Case-Shiller house prices both disappointed. Smoothing through the volatility, the USD ended the night more or less unchanged. Nevertheless, the more circumspect outlook for the global economy took a toll on the NZD. A lacklustre night for commodity prices also weighed, such that the NZD clearly underperformed its peers. As heightened demand for "˜safe-haven' currencies provided a boost for JPY, NZD/JPY fell from 65.20 to 64.20 and this helped drag NZD/USD below 0.7250. Strong selling of NZD/GBP was also noted last night, following a hawkish sounding Bank of England Governor King. The near-term fortunes of NZD/USD will depend on how global sentiment and risk appetite unfolds. However, for today, we suspect dips will be limited to 0.7170. Initial headwinds are expected towards 0.7290. The US Fed's November Board minutes came out at 8am. RBA Deputy Governor Battelino is also speaking at 11:20am (NZT). Currencies traded choppily last night as markets weighed up prospects for the global economy amid a slew of data releases. The net result was that the USD ended the night broadly unchanged. Early in the night, the release of the stronger-than-expected German IFO encouraged risk appetite and demand for "˜growth-sensitive' currencies. The headline business climate index rose to 93.9, above the 92.5 expected. European industrial orders were similarly upbeat, increasing 1.5%m/m in September (1% had been expected). The data tended to offset fresh concerns over the European banking sector, as speculation mounted German bank WestLB will need a government bailout. As a result, EUR/USD found some legs and eventually reached an overnight high close to 1.4990. With the USD in retreat, GBP/USD rose to 1.6580 and USD/CAD fell to 1.0570. However, the weaker USD didn't last for long. A decidedly mixed batch of US economic data released later in the night again raised fears the global recovery is struggling to keep pace with markets' optimistic expectations. Revisions to US Q3 GDP were about as expected. The 3.5%q/q gain was revised to 2.8%. But the composition was a little disappointing for markets. Personal consumption was revised to 2.9%q/q compared to expectations of 3.2%. US consumer confidence was not as weak as feared, but the Richmond Fed manufacturing index and the Case-Shiller house price index came out on the weaker side of expectations. All in all, certainly not the picture of rapid recovery some have been banking on. As a result, equity markets eased (the S&P500 is down about 0.3% currently) and "˜safe-haven' support for the USD and JPY returned. USD/JPY fell to 88.40 "“ the lowest level in six weeks, while EUR/USD pared earlier gains, falling back to around 1.4950. Fears about the outlook for global growth also took a toll on commodity prices, which impacted on demand for "˜growth-sensitive' currencies like NZD, AUD and CAD. Oil prices fell nearly 2% while the broader CRB index was off around 1%. Looking ahead, markets are eagerly awaiting the minutes from the Fed's November meeting at 8am for further clues on the Fed's policy outlook. The Fed will likely retain the phrase interest rates are on hold for an "extended period", underscoring the fact the Fed is unlikely to move on rates anytime soon. All up, the USD index is expected to remain well supported on dips towards 74.80-90. However, a push on the USD Index above 77.45 looks unlikely in the short-term. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.