Opinion: Kiwi$ eases off highs as US$ stabilises

By Mike Jones The NZD has eased off its highs over the past 24 hours. After scaling 15-month highs above 0.7630 yesterday morning, NZD/USD has slipped to around 0.7570. After all the excitement earlier in the week, currency markets lacked direction overnight. Most of the major currencies tracked familiar ranges as sentiment was tossed around by solid US corporate earnings reports but generally weaker-than-expected data developments. It was really a night of stabilisation in the USD, and this combined with an easing in commodity prices saw "˜growth-sensitive' like the NZD underperform. In addition, market chatter of a hedge fund being forced to liquidate a large NZD/USD position likely further weighed on the NZD. Despite the rumour not being confirmed, traders were a little reluctant to push the NZD/USD any higher in the short-term. Yesterday's Chinese data dump was a little mixed. While Chinese GDP was a touch weaker-than-expected (8.9% vs. 9.0% expected), industrial production was on the firmer side of expectations (13.2% vs. 13.2% expected). Overall, the data proved to be a bit of a damp squib, dashing any hopes that surprising strength would provide a catalyst for further AUD and NZD gains. Of note, we still think the NZD has got a little ahead of itself and the case for a correction continues to build. While NZD fundamentals have certainly improved in recent weeks, a NZD/USD close to 0.7600 looks vulnerable to us. Indeed, our short-term valuation model suggests a "fair-value" range in the NZD/USD of between 0.7200 and 0.7400. Nevertheless, while momentum remains positive and sentiment towards the USD generally negative, further NZD/USD gains seem likely in the short-term. For today, there is little out on the data front to provide direction for the NZD. We suspect some profit-taking after the strong gains this week (NZD/USD is up nearly 2.5% over the week) may see NZD/USD struggle towards the previous high of 0.7630. Initial support is seen around 0.7520. Developments in currency markets overnight were best described as a bit of a mish-mash. While US corporate earnings continued to positively surprise, risk appetite eased off its highs as weak US data tempered optimism about the global recovery. As a result, the USD inched higher and "˜growth-sensitive' currencies underperformed. Currency markets struggled a bit for direction overnight. US stocks managed to eek out further gains on the back of positive earnings surprises from 3M, Travelers and McDonalds. So far, over 70% of S&P500 companies that have reported have exceeded earnings expectations. The S&P500 is currently up around 0.8%. However, the data flow out of the US tempered recent optimism about the global recovery. US jobless claims data was a touch worse than analysts had anticipated. Initial claims rose to 531,000 compared to expectations for a fall to 515,000. US house prices also registered a surprise (0.3%) fall. Analysts had expected a modest increase. Boston Fed President Rosengren said the Fed was still waiting for progress on the economy before any monetary stimulus would be removed. These developments, combined with a dour day on European equity markets (the DAX fell around 1.2% and the FTSE was down to 1%) weighed on investors' risk appetite, encouraging a bit of "safe-haven" demand for the USD. The stabilising USD put a brake on the strong gains seen in most of the major currencies this week. Nevertheless, it was more a chance for investors to take profit and any losses were fairly modest. EUR managed to hold above 1.5000. GBP came under a bit of pressure following some disappointing retail sales data (flat vs. expectations for a 0.5% increase). Comments from Bank of England Deputy Governor Tucker that the bank's quantitative easing programme could yet be extended also weighed on GBP. GBP/USD fell to around 1.6500 initially but has since regained most of its losses. CAD suffered after Bank of Canada Governor Carney warned the market that intervention to weaken the currency is an option. The comments tended to outweigh stronger-than-expected August retail sales (0.8% vs. 0.4% expected) and USD/CAD rose from 1.0440 to over 1.0500. A 1% fall in oil prices further impeded the CAD and other "˜commodity currencies' last night. For tonight, all eyes will be on the German IFO business confidence index for October and UK Q3 GDP. Improvement in the IFO will be required for EUR/USD to hold above 1.5000. In the short-term, support is seen around 1.4930. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.