Opinion: NZ$ vulnerable to disapointment from RBNZ's OCR announcement

By Danica Hampton After flirting with 0.7600 on Friday night, NZD/USD slipped steadily lower over the Labour Day weekend and is currently closer to 0.7450. As we start the holiday-shortened week, there's a bit of a sour taste in currency markets. The recent economic news (UK Q3 GDP was a shocker and the German IFO was uninspiring) has tempered optimism about the global recovery. As a result, commodity prices have peeled lower "“ the CRB Index has fallen nearly 2% since Friday. Meantime, a bankruptcy filing from one of the largest US commercial lenders and restructuring talk from ING (it also announced a €7.5b rights issue) has taken a toll on equity markets worldwide. The S&P500 has fallen about 2.5% in two days. As worries about the global recovery resurfaced so too did risk aversion. Our risk appetite index has fallen about 8% from last week's 57% high to 49%. Against this backdrop, investors tended to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD. Short-term speculative players and momentum-driven accounts have tended to be the main sellers of NZD over the past 24 hours.

There's a lot on the local calendar to watch this week. Wednesday's NBNZ business survey will be perused for any further strengthening in October, from what was a solid jump in September. However, Thursday's OCR Review will be the key event. The RBNZ will of course acknowledge the improving news coming through "“ internally and globally. But this is only likely to see the RBNZ suggest hiking a little bit earlier than the late-2010 start-point it emphasised in its September MPS. Given market pricing is now consistent with the RBNZ hiking 25bps in January (and more than 200bps of tightening over the next 12 months) "“ we think the market is vulnerable to disappointment at this week's RBNZ statement. Any downward pressure on NZ interest rates will reduce support for NZD. Overall, we look for the NZD/USD to continue to trade with a heavy bias over the coming week. We suspect NZD/USD will struggle towards 0.7600. Initial support is seen around 0.7440-0.7450 and solid support is expected ahead of the October 16 low of 0.7350. Since NZ markets closed on Friday, the USD has strengthened broadly. Not only has the USD been supported by anticipation of Fed tightening, but risk aversion and soft equities have also played a role. Investors are growing increasingly convinced that the Fed is preparing to tightening monetary policy in the coming months. Since March, the Fed has said it will keep rates low for an "extended period". While rates are expected to remain low for a while yet, an article in the weekend's Wall Street Journal suggested the Fed may change its wording in its upcoming November statement. Anticipation of an end to the Fed's quantitative easing program has helped support US interest rates and the USD. US 2-year government bond yields have risen about 10bps to 1.02% from the lows seen last week. Rising risk aversion and a slide in equity markets also encouraged a bit of "safe-haven" demand for the USD. Stocks in ING Group (one of the world's largest financial services companies) plummeted about 9% after it announced structural changes and that it would launch a €7.5b rights issue to repay state bailout money. Capmark Financial Group (one of the largest US commercial lenders) filed for bankruptcy and worries that a US tax credit to first home buyers (scheduled to expire November 30) will not be extended also weighed on sentiment. The S&P500 is currently down 0.8%. Against a backdrop of a generally firmer USD, EUR/USD skidded from above 1.5050 to nearly 1.4850. EUR sentiment hasn't been helped by soft Eurozone data. The Germany IFO Survey disappointed, with both the business climate and current assessment indices falling short of expectations. And the German GfK consumer sentiment survey slipped to 4.0 in November, well under the 4.5 forecast. GBP/USD plunged dramatically on Friday night, falling from around 1.6700 to below 1.6300, after Q3 UK GDP printed at a shocking -0.4%q/q, well below the +0.2%q/q forecast. However, GBP/USD has stabilised a bit over the past 24 hours. Looking to the week ahead, we suspect the USD will remain on a firmer footing. Recent economic news has tended to temper optimism about the global recovery and elicit "safe-haven" demand for USD. This week investors will be specifically focused on the Q3 earnings reports (Kellogg, Procter & Gamble and Visa) and the US Q3 GDP release. The US Government is also auctioning US$123b worth of debt this week; any further upward pressure on US interest rates should also help underpin the USD. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.