Opinion: Risk building that NZ$ will correct lower
13th Oct 09, 9:15am
By Danica Hampton NZD/USD has spent most of the past 24 hours trading choppily within a 0.7250-0.7350 range. The local currency started the week on a soft footing. Comments from Japanese Finance Minister Fujii, who said Japan was prepare to take "steps" to ensure currencies remain stable, paved the way for a generally firmer USD. Some NZD selling was noted from real money accounts out of Asia and short-term speculative players. Before long, NZD/USD skidded to nearly 0.7250 "“ its lowest level in about a week. Thin trading conditions (thanks to holidays in Japan, the US and Canada) exacerbated the price action. But the NZD/USD weakness proved to be short-lived. US equity markets racked up modest gains, amid anticipation that this week's Q3 corporate earnings will beat analyst expectations. Firmer equities helped underpin risk appetite, which combined with stronger commodity prices (the CRB Index rose 1.6%), sparked some demand for growth sensitive currencies like AUD and NZD. AUD/USD surged about a cent to nearly 0.9080 and NZD/USD rebounded to about 0.7350. We continue to think NZD/USD will struggle to push above last week's high of around 0.7450, and think the risk of a downward correction is building. Locally, August's retail sales is released today. We're looking for a 1.1%m/m rebound in August's retail sales following a sharp 0.5% drop in July. While the retail sector seems to be hanging in, there simply isn't an inflation problem in NZ (we look for annual CPI to fall to 1.2%y/y on Thursday. As such, we suspect the RBNZ will be comfortable to keep rates on hold for a good while yet (our forecasts have the first hike pencilled in for mid-year). In contrast, current market pricing is consistent with nearly a 25bps hike in January and about 175bps of tightening over the next twelve months. For today, we suspect NZD/USD will find sellers on bounces towards 0.7355-0.7360. Initial support is seen ahead of 0.7250. The past 24 hours have been a bit of a roller coaster ride in currency markets. The USD strengthened sharply through yesterday's Asian session, but erased these gains as the night progressed. Thin trading conditions thanks to holidays in the US, Japan and Canada exaggerated the price action. The catalyst for yesterday's USD strength appeared to be USD/JPY. Japan's Finance Minister Fujii said that Japanese authorities would take "steps" to ensure that currency markets remained stable. While Fujii didn't specifically mention intervention, JPY weakness ensued and this paved the way for a broad strengthening in the USD. After falling to nearly 88.00 in the middle of last week, USD/JPY surged to almost 90.50 last night. Against a generally firmer USD, EUR/USD sank to around 1.4670 and GBP/USD slipped below 1.5750. GBP sentiment wasn't helped by a report from the Centre for Economics and Business Research (CEBR), which said British interest rates would stay at 0.5% until 2011 and not rise to 2.0% until 2014. However, the USD strength didn't persist. Modest gains on Wall Street helped underpin risk appetite. Firmer commodity prices helped underpin energy and resources stocks and sentiment has been buoyed more generally by hopes the USD weakness seen over recent months will help Q3 US corporate earnings. The S&P500 rose 0.5% and the CRB Index (a broad measure of commodity prices) is up 1.5%. The backdrop of improving risk appetite and firming commodity prices encouraged investors back into growth sensitive currencies at the expense of the USD. EUR/USD rebounded back above 1.4800, AUD/USD surged about a cent to around 0.9080 and USD/JPY sank to around 89.80. While we've seen a bit of volatility in the past 24 hours, the USD Index is currently sitting around 76.00 where it started the week. There's plenty to keep an eye on over the coming week. Not only is there a slew of data (including US retail sales, the Fed's minutes, the German ZEW Survey and UK CPI), but the US corporate earnings season starts to crank up. Earnings reports are scheduled from IBM, Intel, JP Morgan Chase, Goldman Sachs and Bank of America this week. We're not convinced the USD weakness will continue this week. Not only will any further upward pressure on US interest rates provide support. But, should upcoming Q3 earnings disappoint, a correction in equities may well elicit "safe-haven" demand for USD. All up, we suspect the USD index will find solid support on dips towards last week's low of 75.75-75.80. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.