Opinion: Kiwi$ back to earth on renewed US financial sector fears

By Mike Jones The NZD fell back to Earth with a thud last week, taking out the title of worst performing currency for the week. Having started the week above 0.7550, a slide across global equities and a rapid unwinding of investors' risk appetite sent the NZD/USD tumbling back towards 0.7200. The 4.8% weekly decline in NZD/USD was the largest since January. The NZD found few friends on Friday night. Generally lacklustre US personal spending and consumer confidence data highlighted the fragility of the US economic recovery. At the same time, renewed fears about the US financial sector (an accounting expert said Citigroup will have to take a US$10b Q4 tax charge) further weighed on equity markets. The S&P500 finished the week down 4%, sending risk appetite to its lowest level since July. Our risk appetite index (which has a scale of 0-100%) has fallen to 40%, from as high as 58% a little over a week ago. The backdrop of falling equities and rising risk aversion saw investors shun growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. NZD selling has been noted from a range of short-term speculative players, but momentum and model accounts have been particularly active. NZD selling was particularly marked against the JPY, reflecting the renewed appetite for safe-haven currencies. NZD/JPY has fallen to around 64.50 from above 69.00 at the start of last week. The RBNZ last week effectively kicked the currency when it was down. At its October OCR review, the bank put the kibosh on market hopes for an early rate rise, declaring once again that rates will remain on hold until the second half of 2010. For this week, September quarter's wage and employment measures will dominate the local data calendar. It's the Q3 unemployment rate that's likely to capture the greatest market attention. We're looking for a lift to 6.5%, from Q2's 6.0%. But there are risks to this view, on either side, and Thursday's employment report, in its entirety, has the potential to be a big market mover either way. The week ahead also sees ANZ commodity price index for October, in which a generally higher currency will likely counter lifts in international commodity prices, to leave the NZD-denominated index about flat for the month. Results from Fonterra's latest online dairy price auction will be released tonight. For the week ahead, factors both locally (reduced interest rate support) and offshore (lower risk appetite) are conspiring against the NZD. As such, we suspect the NZD will struggle again this week. If the mood in global equity markets remains defensive, we may see NZD/USD test initial support around 0.7050. A break through that level may open up a deeper pull-back towards 0.6900. The USD and JPY advanced strongly on Friday night as a sharp fall in global equities stoked "safe-haven" demand. Renewed fears about the outlook for the global economy saw US stocks plummet on Friday night. The S&P500 fell 2.8%, to register a 4% decline for the week "“ the largest such decline since May. While it is hard to pinpoint the exact catalyst for the loss of investor confidence, a decidedly mixed batch of US data certainly didn't help. September consumer spending fell 0.5%, following the 1.3% surge the month before. Meanwhile, according to the University of Michigan survey, consumer confidence dipped slightly. While both pieces of data were close to expectations, they served to highlight the fragility of the US economy. Renewed concerns about the global financial sector also weighed. Fitch downgraded 7 UK Building Societies and accounting expert Robert Willens said Citigroup was likely to have a US$10b charge on its deferred tax assets in Q4. The S&P financials index fell nearly 5%. As global equities plunged, investors' appetite for risk retreated and commodities prices dropped. The VIX index of risk aversion (based on the implied volatility of the S&P500) soared to 30%, having started the week closer to 20%. Meanwhile, the CRB index (a broad measure of commodity prices) fell 2.1% (to be over 5% off its highs). Last week's noticeable reduction in risk appetite provided strong support for "safe-haven" currencies like the USD and JPY. The USD rose around 1.2% over the week, the biggest weekly gain since June. And strong demand for the USD helped drive US interest rates down further; 10-year US Treasury yields fell over 10bps over the week. USD/JPY fell back towards 90.00, having started the week above 92.00. Meanwhile, "growth-sensitive" currencies such as CAD, AUD and NZD were the biggest casualties, falling between 2.5% and 5% last week. Sentiment towards CAD was not helped by Friday's weaker than expected GDP result (-0.1% m/m vs. 0.1% expected). For this week, the global reassessment of global growth prospects and elevated risk aversion are expected to keep the USD well supported on dips. In the short-term, support will be found around the 76.00 figure. USD prospects will remain closely tied to sentiment in equity markets. In this regard, there is a wealth of event risk to watch out for this week. On the data front we get PMIs for the UK, Eurozone and China, while in the US the focus will be on the ISM survey and Friday's non-farm payrolls. But it is this week's central bank meetings which have the potential to cause the most market reaction. The RBA, BoE and the Fed all meet this week. While another rate rise from the RBA looks fait accompli, statements from the BoE and the Fed will be closely scrutinised for any change in language from previous statements. Any hint from the Fed that an end is in sight for their ultra-loose policy stance would surely send US bond yields, and the USD, rapidly higher. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.