Opinion: Kiwi$ firm against weak US$ as market focusses on Fed statement

By Mike Jones The NZD/USD ground higher last night, benefiting from an improvement in risk appetite and the weaker US dollar. Yesterday's Australian retail sales data were a little mixed. Sales for the September month slipped 0.2%, compared to the market's expectation for a 0.5% expansion. However, quarterly volumes fell by just 0.4%, a smidge better than the -0.5% forecast. Nonetheless, AUD/USD fell back below 0.8900, which dragged NZD/USD below 0.7200. However, both NZD and AUD recovered lost ground overnight as upbeat European data and solid gains across equity markets helped risk appetite clawed back recent losses. European and UK PMIs exceeded markets' already robust expectations, sending European equity markets higher. Despite some lacklustre US data (ADP employment and the ISM non-manufacturing survey) and Fitch's downgrade of Ireland (to AA-), the stronger data encouraged risk appetite and saw "˜safe-haven' positions in the USD and JPY pared back. Commodity prices posted modest gains on the back of a fresh high in gold prices (above US$1090 ounce) and the World Bank raised its forecasts for East Asian growth (to 6.7% for 2009, from 5.3%). All of this served to boost demand for the NZD; NZD/USD reached a fresh high for the week around 0.7275. Today is likely to be an eventful day for currency markets and the NZD. The Federal Reserve is due to announce its interest rate decision at 8:15am. Given there is some speculation of a change in the Fed's language, volatility in the USD is expected whatever the outcome. (The Fed statement is now out, here is a link to it.) Later in the day the Q3 HLFS is released (at 10:45am). We're looking for a lift in the unemployment rate to 6.5%, from Q2's 6.0%. But there are risks to this view, on either side, and the employment report, in its entirety, has the potential to be a big market mover. RBNZ Governor Bollard is also speaking at 12:45pm at the Trans Tasman Business Circle "“discussing the similarities & differences between NZ and the Australia. Reflecting today's heightened event risk, there is potential for NZD/USD to trade wide ranges. Initial support is eyed ahead of 0.7150, with solid support expected towards 0.7100. Headwinds are expected ahead of 0.7360. The USD weakened against most of the major currencies last night as easing risk aversion reduced "˜safe-haven' demand. Risk appetite was underpinned early in the night by stronger-than-expected data. The October batch of Eurozone PMIs confirmed expectations the trend recovery in the global manufacturing sector is continuing. The Eurozone composite PMI remained at 53.0 (as expected), while the services PMI exceeded expectations slightly (52.6 vs. 52.3). But it was the UK services PMI that really captured market attention, rising to 56.9 against the 55.5 expected. Investors were quick to buy GBP on the back of the release. GBP/USD rose from 1.6430 to nearly 1.6550 and this paved the way for a more general weakening in the USD. EUR surged back above 1.4800, while USD/JPY rose from 90.20 to 90.90. European stocks took heart from firming prospects for Q4 growth. The DAX rose 1.7% and the FTSE was up 1.4%. The World Bank raised its forecasts for East Asian growth, to 6.7% for calendar year 2009 (from 5.3%) and 7.8% for 2010. Gold prices reached a new record high above US$1090, which underpinned another modest rise in commodity prices overnight. This further stoked demand for "˜growth-sensitive' currencies like AUD and NZD, at the expense of JPY and USD. Gains in CAD were held back a little by a speech by Bank of Canada deputy Governor Murray. Murray reiterated the BoC's past warning that the strong CAD is offsetting positive economic developments in Canada. Developments later in the night tempered risk appetite a little. The US ISM non-manufacturing survey fell to 50.6 (51.5 expected) and ADP employment fell 203,000 (198,000 expected). Fitch also downgraded Ireland's sovereign rating to AA-. However, the strong lead from European stocks and a better-than-expected profit report from Time Warner were enough to keep US stocks in the black and risk appetite supported. The S&P500 is currently up just over 1%. This week's main event - the Fed's policy announcement "“ kicks off at 8:15am. In particular, markets are looking out for whether the Fed retains the line that interest rates will remain low for an "extended period". A similar statement to September (including the "extended period" phrase) would likely undermine the USD, prompting further gains in the majors. If the phrase is dropped, expect a bounce in US bond yields and the USD. Later tonight, interest rate decisions from the Bank of England (BoE) and the ECB are scheduled. No change is expected from the ECB, while the BoE is expected to keep interest rates unchanged and announce a £50b increase to its quantitative easing program. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.