Opinion: NZ$ off highs but may rebound with A$ on Aussie CPI

By Danica Hampton The NZD/USD maintained its downward trajectory last night, falling from above 0.7500 to within a smidge of 0.7400. Worries about the global recovery continue to dominate currency markets. These concerns weren't helped by last night's lacklustre US data, both the Conference Board consumer confidence index (fell to 47.7 vs. 53.5 forecast) and Richmond Fed manufacturing index (fell to 7 vs. 14 forecast) disappointed. Concern about the global outlook has weighed on commodity and equity prices. Over the past week, the S&P500 has shed more than 3% and the CRB Index (a broad measure of commodity prices) has dropped nearly 3.5%. Against the deteriorating global backdrop, investors have tended to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD. At the margin, the media sound bites from Prime Minister Key (and to a lesser extend Finance Minister English) expressing concern about recent NZD strength may have helped take the shine of the NZD. While Asian real-money accounts were reportedly buyers of both NZD and AUD yesterday, this was outweighed by selling from macro-driven accounts and short-term speculative players. There is plenty to watch trans-Tasman today. In NZ, the NBNZ business survey is due at 3pm. In Australia, Q3 CPI will be watched for clues on RBA policy. The market is expecting headline CPI to rise 0.9%q/q and the underlying inflation measures to rise 0.7%q/q. Should the underlying inflation measures print closer to 1.0%q/q - we'd expect investors to start betting on a 50bps rate hike in November. This sort of result would likely see NZD/USD pulled higher on the coat-tails of the AUD/USD. However, we expect NZD/AUD to remain heavy and a re-test of 0.8050 looks likely in the next few days. Overall, we continue to look for NZD/USD to trade with a heavier bias. We suspect bounces will be limited to 0.7490-0.7500. Initial support is seen ahead of 0.7410, but a re-test of the October 16 low looks likely in coming sessions. The USD strengthened against most of the major currencies last night, as worries about the global recovery and risk aversion resurfaced. Over the past week or so, a string of lacklustre data has cast doubts over the strength and timing of the global recovery. Last night's US data did little to help confidence. The US Conference Board consumer confidence index fell to 47.7 in October, well below forecasts of 53.5 and its weakest since July. Meantime, the Richmond Fed manufacturing index fell to 7, materially below expectations of 14. As worries about the global economy have escalated, commodity and equity prices have slipped. The CRB index, a broad measure of commodity prices, has fallen nearly 3.5% from last week's highs. Similarly, the S&P500 has slipped more than 3% from the peak seen early last week. And our risk appetite index (which has a scale of 0-100%) has fallen about 8% from last week's 57% high to 48.5%. Against the deteriorating global backdrop, investors have tended to seek out the relative safety of the USD. In fact, the USD has risen nearly 2% from last week's lows. Overnight, EUR/USD has been hit particularly hard "“ falling from above 1.4900 to around 1.4780. USD/JPY slipped from around 92.20 to 91.80, cushioned a little by chatter about month-end Toushin (Japanese investment funds) launches and US Treasury coupon repatriation. GBP/USD seemed somewhat insulated from the broader USD moves. It spent the night in a 1.6300-1.6450 range. It seems that GBP/USD is still licking its wounds after plunging dramatically (from 1.6700 to below 1.6300) after Friday night's shocking Q3 UK GDP. Last night's UK CBI headline sales printed on the strong side of expectations - just another piece of evidence hard to square away with last Friday's Q3 GDP. US interest rates fell sharply last night following strong demand at the US Treasury's auction of US$44b 2-year government bonds. The bid-to-cover ratio was 3.67, the highest in more than two years and indirect bidders (usually thought of as a proxy for offshore central bank demand) took out 44% of the auction. US 2-year government bond yields fell 8bps to 0.94% and 10-year yields fell 8.5bps to 3.47%. Looking ahead, we suspect the USD will remain on a firm footing. Recent economic news has tended to temper optimism about the global recovery and elicit "safe-haven" demand for USD. For today, we suspect bounces in EUR/USD will be limited to 1.4830-1.4850. A pull-back to at least 1.4650-1.4675 looks likely in coming sessions. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.