Opinion: NZ$ flirts with Aussie$ highs on falling metal prices

By Mike Jones The NZD/USD has spent the last week trading choppily in a 0.7080-0.7250 range. Investors' risk appetite has come under renewed pressure over the past week or so, which has halted gains in "growth sensitive" currencies like the NZD. Fears about the strength of the global outlook saw US equities posted their second consequent weekly decline last week, boosting "safe-haven" demand for the USD. Friday night was a volatile one for the NZD. The closely watched US non-farm payrolls data came out much weaker than markets had anticipated (-263,000 vs. -175,000 expected), sending US stocks and bond yields lower. As safe-haven demand for the USD increased, the NZD/USD was briefly knocked below 0.7100. However, the NZD didn't hang around these levels for long. A late rebound in stock markets and solid central bank demand for EUR on dips paved the way for a more general weakening in the USD. Recovering risk appetite also weighed heavily on JPY. NZD/JPY surged from around 63.20 to above 64.20 and this helped lift NZD/USD back above 0.7150. In contrast, AUD spent Friday night dribbling lower, weighed down by falls in industrial metals prices. As a result, NZD/AUD drifted higher on Friday night and is now flirting with recent highs around 0.8300. For this week, creeping doubts about the strength of the global recovery are expected to keep the USD supported on dips. Indeed, officials are becoming increasingly vocal on the need for a strong dollar. In the near-term, this is expected to present some headwinds for further NZD appreciation. We suspect NZD/USD bounces will be limited to the 0.7250 region. However, some support may be found in surging business confidence, with the Q2 QSBO due to be released on Tuesday. The only question is how far the headline reading might go. Elsewhere in the week, ANZ's NZD denominated commodity price index will come under pressure from the trade-weighted appreciation in the NZD during September. The USD ended last week higher, for the second week in a row. However, it was a different story on Friday night. The release of US non-farm payrolls (NFP) caused significant volatility, but the end result was a slightly weaker USD. US employment fell by 263,000 in September, much weaker than the 175,000 fall analysts had expected. In response, US equities weakened sharply on the open and 10-year bond yields fell to nearly 3.1%, the lowest since May. With the NFP report highlighting the still fragile nature of the US economy, risk aversion spiked higher prompting increased demand for "safe-haven" currencies like USD and JPY. USD/JPY fell to nearly 88.60 and EUR/USD dropped to around 1.4480. However, these moves were quickly reversed. A late rebound in US stocks (the S&P500 closed -0.5%, having fallen as much as 1%), and rumours that central bank reserve managers were keen buyers of EUR on the dip, saw EUR rebound almost 1% to 1.4620, and this paved the way for a more generalised USD weakening. CAD fell from above 1.095 to below 1.080, while NZD and AUD both rebounded over 1%. Earlier JPY strength was also reversed "“ USD/JPY surged 1.5% to around 89.90. A meeting of G-7 finance ministers over the weekend did little to help USD sentiment. While officials continued the call for a strong USD, the meeting's accompanying statement failed to single out USD weakness as a concern, a softer approach than their April meeting. Nevertheless, it remains clear that officials do not want a dramatically weaker USD. Calls for a stronger dollar have been loudest in Europe where the appreciating EUR threatens to derail the tentative economic recovery. However, US Treasury Secretary Geithner has also joined the chorus, on Friday saying a strong dollar was important to the US. We do not expect the USD weakness to continue at the same pace over the coming months and suspect the USD index will find solid support on dips towards 75.90-76.00. The next key test for global equity markets, and hence the USD, will be the upcoming US corporate earnings season which kicks off this week. If earnings fail to beat (relatively lofty) expectations, watch out for further weakness in equity markets and lower risk appetite. This sort of environment would likely see "safe-haven" demand support the USD. The data calendar for this week is relatively light, although central bank announcements help fill the void. The RBA, ECB and BOE are all set to meet, with no change expected from any. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.