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Opinion: NZ$ treads water ahead of Chinese data; UK at risk of rating downgrade

Opinion: NZ$ treads water ahead of Chinese data; UK at risk of rating downgrade

By Danica Hampton The NZD/USD spent most of the past 24 hours within a 0.7380-0.7450 range. With the Veterans Day holiday looming in the US (November 11), currency markets tended to tread water last night. GBP saw the most action last night, plunging after weak UK trade data and Fitch saying the UK economy was the most at risk of losing its AAA rating. The German ZEW survey wasn't particularly inspiring, but rumoured demand from sovereign and quasi-official accounts helped EUR/USD poke its nose briefly above 1.5000 before easing off its highs. Both equity prices and commodity prices nudged lower last night. In the absence of fresh news (aside from the mixed reports out of UK banks) profit-taking kicked in after yesterday's stellar equity market performance. Commodity prices were weighed down by a sharp decline in oil prices (after the International Energy Agency reduced its long-term forecasts for global oil demand) and by rumours that today's Chinese trade data will be worse-than-expected. The backdrop of soft equity and commodity prices helped take the shine of growth-sensitive currencies like NZD. The focus for today will be the slew of Chinese data (including the trade deficit, retail sales and industrial production) due out this afternoon. Better-than-expected data will underpin global recovery hopes and risk appetite, so could provide a leg up for the NZD. Softer-than-expected data will probably keep currencies treading water within familiar ranges. Locally, we'll see the release of the RBNZ's semi-annual Financial Stability Report (FSR) (due 9:00am). We wouldn't be surprised if the FSR echos the sentiment of recent Monetary Policy Statements and warns that the recent NZD strength is a potential threat to the sustainability of NZ's economic recovery. For today, expect dips in NZD/USD to be limited to 0.7375. Initial headwinds are seen around 0.7450-0.7460, but a push higher towards 0.7500 is possible if the Chinese data prints on the stronger side of expectations. The USD spent the night shuffling sideways against most of the major currencies. It was really GBP that took centre stage. GBP/USD plunged from above 1.6750 to nearly 1.6600 early in the night amid weak UK trade data and negative comments from rating's agency Fitch. The UK trade deficit widened to £3.8b in September, materially worse than analyst forecasts of £3.0b. Fitch said the UK was the economy most at risk of losing its AAA rating. However, later in the evening, strong demand for GBP/EUR at the London 4pm fix saw GBP/USD rebound back toward 1.6750. EUR/USD spent most of the night within 1.4950-1.5000. The business confidence measure of the German ZEW survey fell to 51.1 in November, worst than forecasts of 55.00. However, the current situation index improved to -65.6, better than the -70.0 forecast. Despite the mixed data, reportedly solid demand from quasi-sovereign accounts saw EUR/USD push above 1.5000. However, the currency couldn't sustain the lofty levels "“ the aforementioned GBP/EUR fix demand and EUR/JPY supply saw EUR/USD ease back towards 1.4950. Global equity markets nudge lower last night. In the absence of fresh news, profit-taking kicked in after yesterday's stellar performance. There was mixed news on UK banks "“ HSBC shares rose about 4% after its said its Q3 profits were "significantly ahead" of this time last year, but Lloyds shares fell after it announced plans to lay off another 5,000 workers. The FTSE was flat, the DAX dropped 0.2% and the S&P500 is currently down 0.2%. Oil prices eased to around US$78/barrel as the tropical storm in the Gulf of Mexico began to subside and the International Energy Agency (IEA) reduced its long-term forecasts for global oil demand. The CRB Index, a broad measure of commodity prices, slipped 1.2%. Rumours of worse-than-expected Chinese trade data also did the rounds and this may have helped take the shine off commodity prices and risk appetite. Last month's trade surplus rose to US$19.1b; forecasts for October are US$18.9b. In any case, keep an eye out for the slew of Chinese data (including the trade deficit, retail sales and industrial production) due out later today. More generally, the lack of USD supportive comments from the weekend's G20 meeting, combined with last week's Fed commitment to keep rates lows for "an extended period", seem to have set the scene for USD to remain heavy this week. On the USD Index, expect bounces to be limited to the 76.50 region. Solid support is seen ahead of the October low of 74.90, but a break below this level will open up the downside towards 74.00. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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