Opinion: NZ dollar weaker on safe haven demand, but Fonterra payout may boost
9th Nov 09, 8:37am
By Danica Hampton US non-farm payrolls disappointed expectations. The number of jobs fell by 190,000 in October and the unemployment rate surged to a 26½-year high of 10.2%. The worrisome US data sparked a bout of "˜safe-haven' demand, which initially saw both the USD and JPY strengthen. NZD/JPY fell from above 65.60 to below 65.00 and NZD/USD fell sharply below 0.7200. However, the USD strength didn't last long. US equity markets managed to eke out gains (thanks to analyst upgrades of both General Electric and Macy's) and this helped support risk appetite. The S&P500 rose 0.3% on Friday and NZD/USD finished the week closer to 0.7250. There was little to write home about from the weekend's G20 meeting. The G20 agreed the economic recovery is too fragile to start removing stimulus measures, but stayed relatively mum on currencies. The absence of USD supportive comments from the sidelines of the G20, combined with an IMF report suggesting the USD is still "on the strong side" and last week's Fed commitment to keep rates low for an "extended period", will likely see the USD start the week on a heavy footing. While last week's HLFS (where employment fell 0.8%q/q and the unemployment rate rose to 6.5%) wasn't particularly inspiring and Governor Bollard warned about the fragility of NZ's economic recovery, it hasn't been all bad news on the local front. Last week's online auction showed that milk powder prices have risen 87% over the past five months. Strong gains in dairy prices may be providing a bit of buffer against the high NZD for some NZ exporters. In fact, Fonterra has just announced an upward revision to its 2009/10 dairy payout, from NZ$5.10/kg to NZ$6.05/kg. Against a generally weaker USD, we'd expect NZD/USD to remain well supported on dips towards 0.7150 this week. Initial headwinds are expected ahead of 0.7375, but a push towards 0.7450 is possible if the USD remains weak. The USD shuffled sideways on Friday night, as investors digested the mix of poor US non-farm payrolls and firmer US equities. US non-farm payrolls fell by 190,000 last month, worse than the 175,000 decline anticipated by economists. As a result, the unemployment rate jumped to 10.2% - its highest level in 26½ years. The only positive aspect of the report; the number of jobs lost in both August and September were revised lower. The knee-jerk reaction to the data saw equity markets plunge and US 2-year yields fall below 0.84% - a six month low. "˜Safe-haven' demand supported the USD; EUR/JPY sank below 1.4820 and USD/JPY slipped sharply from 90.80 to below 89.80. Despite disappointing US non-farm payrolls, equities recovered as the night wore on and this reduced the "˜safe-haven' support for the USD. Equity sentiment was cheered by an analyst upgrade of General Electric (its shares rose 6.2%) and Macy's (its shares rose 6.4% after JP Morgan Chase said the department store likely beat Q3 profit estimates). The S&P500 rose 0.3% on Friday and finished the week up 3.2%. The weekend's G20 meeting didn't really provide fresh insight for currencies. While some officials were vocal in calling for greater CNY flexibility, little else was said about foreign exchange. The G20 did launch a new framework aimed at rebalancing the global economy and agreed the global economic recovery was still too fragile to start removing the emergency economic support. A report from the IMF warned that traders are probably using the USD to fund carry trades and that the USD is still "on the strong side". Unlike last week, there is little on the global data calendar this week. The highlights will be the Bank of England's Inflation Report, German ZEW Survey and Eurozone Q3 GDP. With little in the way of key data scheduled for the week ahead, we suspect currencies will take their cues from risk appetite and equity market sentiment. The S&P500 rose 3.2% last week and risk appetite recovered strongly (our risk appetite index is currently sitting at 50%, well above the 39.5% low seen October 30). As such, we suspect the USD will start the week on a heavy footing. Indeed, the absence of supportive USD comments from the sidelines of the G20, combined with last week's Fed commitment to keep rates lows for "an extended period", may well be setting the USD up for further weakness this week "“ provided equity markets and risk appetite remains buoyant. On the USD Index, a re-test of support around the October low of 74.90 may be on the cards. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.