Opinion: 'Doomsday' risk for NZ$ reduced after better than expected current account figures

By Mike Jones NZD has been the strongest performing currency over the past 24 hours. NZD/USD has risen nearly 2% on firming prospects for the NZ economy and generalised USD weakness. Yesterday's Q2 balance of payments release was a real bolter. We can't recall a bigger surprise, and especially not one so positive. The Q2 current account deficit shrank to 5.9% of GDP, from a downwardly revised 8.1% in March. Our economists are now forecasting the deficit to reduce down to the vicinity of 4.2% of GDP by the end of this year. All up, it means the "˜doomsday' risk on the NZD from a harsh current account adjustment at some point in future has probably been reduced. That said, markets seemingly took the data in their stride "“ NZD/USD nudged only marginally higher following the release. It was Fonterra's surprise move to bump up its payout forecast for the current season to $5.10/kg milksolids (from its opening forecast of $4.55) that really lit a rocket under the NZD. NZD/USD gapped about ¾ of a cent higher immediately following the announcement, and continued to drift higher over the day. Solid demand for NZD from macro and speculative players was noted and gains soon spread to the NZD crosses. NZD/AUD hit new 6-month highs above 0.8260 while NZD/GBP, at around 0.4420, is now at the highest level since 1996. The revised payout forecast also saw markets speculate on an earlier start to RBNZ tightening. The 2-year swap rate rose 8 basis points to 4.16%, boosting the yield advantage of the NZD. NZ-US interest rate spreads widened out to 284 basis points. Overnight, a broadly weaker USD and rising risk appetite provided additional support for NZD/USD. Equity markets put in a solid performance overnight and several government officials were on the wires sounding upbeat about the global recovery. As a result, NZD/USD was soon pushed through 0.7200 and this is around where we open this morning. Near-term NZD prospects will be contingent on the outcome of tonight's FOMC meeting, and NZ GDP data due this morning. We are expecting a small fall (-0.1% q/q). However, a positive number is certainly not out of the question and this would see the greatest reaction from the NZD. US dollar weakness resumed with a vengeance overnight. Having consolidated over the past few days, the USD index once again flirted with one-year lows around 76.00. USD selling was noted from a wide variety of players, including large macro accounts and Asian sovereigns. At the same time, strong Asian and options-related demand for EUR pushed EUR/USD to a new 13-month high around 1.4820, and this paved the way for further USD weakness. ECB Council member Weber said that "the behaviour of the foreign exchange markets is not out of line" with some of the stronger data that has been coming out of the Eurozone. Weber's comments were interpreted as a sign the ECB is comfortable with the recent strength in the currency and were taken as a "˜green light' for further EUR appreciation. US data out overnight had little bearing on currency markets. The Richmond Fed manufacturing index held steady in September (below expectations for a small rise), while the 0.3%m/m increase in July's house price index was also a touch below expectations. Nevertheless, US stocks managed to eek out small gains "“ the S&P500 is up around 0.7%. Gains in equities combined with upbeat comments from various government officials spurred optimism about the global outlook, and encouraged investors' risk appetite. Our risk appetite index is now around 52% (on a scale of 0-100%), the highest in over a year. US Treasury Secretary Geither said "We are at the very beginnings of this recovery". Meanwhile, a report from the Asian Development Bank said that the Asian region (ex-Japan) would grow by 3.9% this year, and increased their projection for next year to 6.4% from 6% boosting hopes Asian can lead the rest of the world out of recession. Optimism about the 2010 global outlook and recovering risk appetite added to the downward pressure on the USD as "˜safe-haven' trades in USD and JPY were unwound. Growth sensitive currencies like AUD, NZD and CAD were generally amongst the strongest performing currencies overnight, underscored by broad-based gains in commodity prices. The CRB index (a broad index of commodity prices) rose 2.6%, more than reversing yesterday's losses. The next key test for the USD will be the outcome of the two day FOMC meeting due tomorrow morning. While it's unlikely to contain any big surprises, the statement will be closely scrutinised for any changes to the timing of the Fed's asset purchase scheme. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.