Opinion: NZ$ solid for now but English says high NZ$ is serious concern

By Danica Hampton NZD/USD has spent the past 24 hours within a 0.7300-0.7450 range. Over the past day or so, growing confidence in the global economic recovery and a strong performance from equity markets has helped underpin growth sensitive currencies like NZD. Not only did China's trade data surpass expectations, US retail sales and the UK unemployment rate were also fairly upbeat. Meantime, equity markets have been bolstered by strong Q3 earnings results from Intel and JPMorgan Chase. Investors are hopeful that upcoming earnings results from the other big banks (including Citibank, Bank of America and Goldman Sachs) will also beat expectations. The S&P500 is currently up 1.6% - its highest level in about a year. Against a backdrop of rising equities and improving risk appetite, investors tended to ditch low-yielding "safe-haven" currencies like the USD. With the USD in retreat, NZD/USD steadily pushed higher and flirted with a high of 0.7435 last night. However, it's worth noting, NZD tended to under perform against most other currencies. NZD/EUR slipped from nearly 0.4990 to below 0.4950 and NZD/GBP fell from above 0.4650 to nearly 0.4600. After climbing to nearly 0.8150 yesterday, NZD/AUD is sitting closer to 0.8080 this morning. Finance Minister English is clearly concerned about the recent NZD strength. Speaking after the release of the Crown Accounts, English warned that the high NZD was a "serious" concern for NZ's economic recovery. The Crown Accounts themselves were also fairly dismal. The Government's finances for the year to June 2009 were clearly worse than the May 2009 Budget anticipated. The core operating balance registered a deficit of NZ$3.9b (2.2% of GDP), worse than the NZ$2.9b deficit assumed in the Budget. For today, we continue to think NZD/USD will struggle to break above last week's high of 0.7450. However, given the general USD weakness, dips will likely be limited to 0.7320. The USD weakened against most of the major currencies last night, as stronger-than-expected Q3 corporate earnings and upbeat data helped restore confidence in the global economy. JPMorgan Chase reported a Q3 profit of US$3.6b. This translated to a net income of 82 cents per share, well above analyst forecasts of 51 cents. The stronger-than-expected result has sparked hopes for a patch of prosperity in the banking sector and investors are now anticipating a strong results from the other big banks reporting this week (including Citibank, Bank of America and Goldman Sachs). The strong earnings result lit a fire under Wall Street. The S&P500 is currently up 1.6% - its highest level in about a year. The global economic news has also been fairly upbeat. China's trade data for September surpassed expectations; exports fell just 15.2%y/y (vs. -21.0% forecast) and imports slipped 3.5%y/y (vs. -15.0% forecast). While some benefit is likely coming from the "cash for clunkers" program, US retail sales rose 0.5%m/m in September, well above forecasts of 0.2%. Meantime, in the UK, unemployment claims rose "just" 20,800 (vs. 24,500 forecast) and the unemployment rate eased back to 5.0% from August's 5.1%. The strong performance from global equities and growing confidence in the global economic recovery helped underpin risk appetite. As a result, investors ditched low-yielding "˜safe-haven' currencies like the USD. The USD Index (a trade weighted basket of currencies) skidded to a fresh 14-month low of 75.40. The FOMC Minutes also encouraged some knee-jerk selling of USD. While Committee members had mixed views on how best to wind back its asset purchase program (there was even some discussion about whether the size of the asset purchase program should be increased), the minutes made it clear that US interest rates would remain low for quite some time to come. Against a generally weaker USD, EUR/USD sky-rocketed from below 1.4880 to nearly 1.4950. France's Economic Minister Lagarde said the EUR will be discussed at next week's Eurogroup meeting. Reports from a Eurogroup source suggest further EUR strength could become a concern for Eurozone policymakers. Looking ahead, the near-term fortunes of the USD will rest with risk appetite and global sentiment. Should upcoming Q3 earnings reports continue to surpass expectations, and equities continue to push higher, the USD will likely remain under selling pressure. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.