Opinion: Kiwi$ strong near 74.4 USc despite Key reiterating OCR on hold til late 2010
16th Nov 09, 8:57am
By Mike Jones The NZD was the strongest performing currency on Friday night. A combination of broad-based USD weakness and renewed optimism about the global recovery pushed NZD/USD up to nearly 0.7440. "˜Growth sensitive' currencies like the NZD tended to outperform on Friday night. US stocks finished the week on a solid footing (the S&P500 rose 0.6% to be up 2.3% for the week) as upbeat earnings announcements from US retailers JC Penney and Abercrombie & Fitch buoyed optimism about the outlook for US consumption. Meanwhile, news the Eurozone economy has now formally exited recession (September quarter GDP rose 0.4% vs. 0.5% expected) supported gains in European stocks and further underpinned investors risk appetite. As a result, investors shunned "˜safe-haven' currencies like JPY and USD in favour of the likes of EUR, AUD, and NZD. Our short-term valuation model suggests a "˜fair value' range in the NZD/USD of 0.7300-0.7500. Fair value has been driven higher by a combination of factors; recovering risk appetite, higher NZ commodity prices and widening NZ-US interest rate spreads. Our risk appetite index (which has a scale of 0-100%) is now back above the long-term average of 50%, having dipped below 40% a fortnight ago. Meanwhile, last week's upward revision to Fonterra's 2009/10 payout forecast (to NZ$6.05kg/ms) is indicative of a positive outlook for dairy prices. All up, these factors suggest that dips below 0.7300 in NZD/USD are unlikely to be sustained, in the absence of another wave of negative fundamental news. This week is relatively light on the data front, with only second tier data due for release (October PSI, Q3 PPIs, Q3 NBNZ Regional Trends and October credit card billings). As such, direction in the NZD/USD will be largely dictated by fluctuations in risk appetite and sentiment in offshore equity markets. However, first up this morning we could see some NZD reaction to comments from Prime Minister Key over the weekend. Key said he would be surprised to see rate hikes by the RBNZ before the middle of next year, the RBNZ Governor is still very concerned about the strength of growth, and an early rate hike may "choke off the flickering flame of economic growth." The USD fell around 0.6% last week, as strong gains across global equity markets reignited investors' risk appetite. US data out on Friday night was a little disappointing. The September trade balance undershot expectations (US$-36.5b vs. US$-31.8b expected) and the University of Michigan consumer confidence survey fell to 66.0 (71.0 expected). Nevertheless, US stocks posted modest gains following better- than-expected earnings results from Walt Disney and Abercrombie & Fitch. An upbeat outlook from JC Penny also spurred optimism about the outlook for the US consumer. The S&P500 rose 0.6%, to be up 2.3% for the week. Positive sentiment in equity markets and optimism about the global outlook saw risk aversion fall back. The VIX index (a common risk aversion indicator) is now sitting around 23%, having reached as high as 32% in early November. With risk appetite on the rise, the USD was knocked lower as investors ventured back into "˜growth sensitive' currencies like EUR, CAD and AUD. Sentiment towards the USD may have been further undermined by comments from Chicago Fed President Evans. Evans said the benign US inflation outlook suggested US monetary policy should remain "highly accommodative for quite some period of time." Against a broadly weaker USD, EUR/USD clawed back above 1.4900, from below 1.4850. News the Eurozone economy formally exited recession also buoyed the EUR. September quarter Eurozone GDP growth grew by 0.4%, marginally softer than the 0.5% expected by markets. France and Germany enjoyed their second successive quarter of growth, while even Italy saw its economy expand by 0.6%. Looking ahead, with risk appetite still on a generally improving trend and the Fed likely to remain on hold for "an extended period", we suspect the USD will remain heavy in the short-term. However, substantial further weakening remains unlikely in our view. For further clues on the outlook for Fed policy, watch out for a speech by Fed Chairman Bernanke tonight. For the rest of the week, the November minutes from recent RBA and BoE meetings, US retail sales and industrial production, UK retail sales, and a speech from ECB President Trichet are likely to be the highlights. It will also be worth watching developments in China as US President Obama tours the region. Speculation has been mounting that China, under heavy political pressure, may soon allow the CNY to appreciate. However, a report in the UK's Sunday Telegraph suggested China has no such plans in the short term. As such, there is potential for some volatility in currency markets first thing this morning as traders digest the weekend report. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.