Opinion: NZ$ falls in lock step with US markets

By Mike Jones Fears over the global outlook and waning risk appetite have weighed on the NZD over the past 24 hours. NZD/USD fell nearly 1.5% last night to around 0.7160. Recent gains in NZD continued through the early part of last night. Solid NZD demand from real money investors bid NZD/USD up to an overnight high around 0.7270. However, much weaker-than-expected US home sales (-2.7%m/m vs. market expectations of +2.1%) spurred fears about the outlook for the US economy. The German IFO was also a shade weaker than the market had been looking for, adding to the negative mood. The S&P500 is down around 1% while European equities are down 1.0-1.7%. Safe-haven demand for the USD increased as weakening stock markets and fears about the strength of the US recovery took a toll on investors' risk appetite. Against this backdrop, most of the major currencies retreated last night. Weakness was most marked in the GBP which fell nearly 3 cents after Bank of England (BoE) Governor King said recent falls in the GBP are "helpful" in rebalancing the UK economy. A broad-based decline in commodity prices (the CRB index is down over 2%) furthered weighed on growth sensitive currencies like CAD, AUD and NZD. As a result, the NZD/USD has fallen around 1.5% over the past 24 hours, from above 0.7260 to around 0.7170. However, despite these falls, the NZD performed better than most of the majors overnight, paving the way for more gains in some of the NZD crosses. Indeed, NZD/GBP made new highs above 0.4480 overnight, while NZD/AUD pushed up to 8-month highs towards 0.8300. It seems the recent spate of "˜good news' about the NZ economy has left real money and macro accounts keen to buy the NZD on dips. For today, renewed risk aversion and fears about the global outlook are expected to limit near-term gains in NZD. NZD/USD sellers are expected to emerge on a push towards 0.7220. On the downside, support is eyed around 0.7130. NZ merchandise trade figures for August are due to be released at 10:45am. A surge in the USD saw most of the major currencies fall overnight as weak US housing data cast doubts on the strength of the US economic recovery. US jobless claims for the week ending September 21 were a touch better than the market expected (+530,000 vs. +550,000 expected). However, the data was completely overshadowed by surprisingly weak US home sales. Existing home sales registered a 2.7% m/m decline in August against expectations for a 2.1% rise. The weak data raised fears about how sustainable the US recovery will be, which tended to weigh on equity markets. US stock indices are down 0.4-1.2%. The FTSE is down 1.2% and the DAX has fallen nearly 2%. Fears about the global recovery and plummeting stock markets (the S&P500 has fallen over 2% over the past two days) weighed on investors risk appetite, and investors flocked back to the "safe haven" of the USD at the expense of "˜growth sensitive' currencies like EUR, AUD and CAD. Fears about the strength of global demand also took a toll on commodity prices. The CRB index (a broad measure of commodity prices) fell around 2%, while oil prices declined over 4.5% to be down around 9% for the week. Predictably, CAD was one of the weakest performing currencies overnight given the weakness in stocks and oil prices. USD/CAD surged above 1.09 from below 1.0750. EUR fell nearly 1% from around 1.4800 to below 1.4650, helped by the weaker-than-expected German IFO business climate survey (91.3 vs. 92.0 expected). Bank of England Governor King said the GBP's recent fall "will be helpful" in rebalancing the UK economy, sending the GBP tumbling towards 1.6050. The US Fed, the ECB, the Swiss National Bank and the BoE last night announced joint measures to scale back some of the unprecedented liquidity provisions put in place during the global financial crisis. The Fed will trim the size and maturity length of its term auction facility, while the other banks are planning on reducing USD swap and repo operations. It should be noted that the scaling back of these measures does not represent a withdrawal of "˜stimulus' per se, it really just reflects the reduced liquidity pressures banks are now facing as interbank cash markets have returned to some sense of normality. Nevertheless, with many viewing the changes as the first step towards an exit strategy, the announcements likely added to the climate of risk aversion overnight. For tonight and over the weekend, all of the attention will be focused on the G20 summit. Markets are will be looking closely for any references to currencies in official statements, in particular the need for further USD weakness. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.