Opinion: GDP growth would push NZ$ higher on Wednesday

By Mike Jones The NZD/USD edged lower on Friday, having reached a 13-month high above 0.7150 earlier in the week. The NZD danced to a familiar beat last week. NZD was one of the strongest performing currencies last week, benefiting from broad-based USD weakness and recovering risk appetite. However it hasn't been all one-way traffic. Fears over the speed and strength of the global recovery continue to flare up, causing volatility in currency markets. On Friday night, a mild bout of profit-taking by leveraged and speculative-type accounts tended to put a lid on further NZD gains and NZD/USD eased back below 0.7100. A sharp fall in Chinese equities (the Shanghai index fell 3.2%) and a cooling in risk appetite also weighed on growth-sensitive currencies like NZD/USD. While global factors have played an important role in recent NZD gains, the currency has also benefited from a general sense the NZ economy has weathered the global recession in relatively good shape. This week will be particularly important in gauging just how quickly the NZ economy is recovering. External migration, balance of payments, and consumer confidence data are all due to be released. But Q2 GDP will probably be the highlight. We've settled on -0.1% q/q (same as the RBNZ, coincidentally) though only after sifting through a swathe of seemingly contradictory indicators. As such, risks around our view are greater than normal, we think, and probably equally distributed either side. Given the inherent volatility in NZ's quarterly GDP numbers, a positive number is certainly not out of the question. This sort of result would probably see the greatest reaction from the NZD. Absent any shockers on the data-front, we wouldn't be surprised to see the market try and take NZD/USD higher this week, certainly if USD sentiment remains negative and risk appetite solid. Nevertheless, we think the case for a correction is building. Indeed, our short-term valuation model suggests a "˜fair value' range for the NZD/USD of 0.6750-0.6950. However, we're unlikely to see any major moves today as markets await the data later in the week and markets in Japan and Singapore are away on holiday. The USD squeezed higher on Friday night in a relatively subdued offshore session. The USD was under pressure most of last week on reduced "safe-haven" demand, falling US bond yields and worries that Asian central banks may be diversifying reserves have weighed on the USD. However, a mild bout of profit taking and a cooling in risk appetite saw the USD claw back some of last week's losses on Friday. With little in the way of fresh economic news, markets focused on equity markets to provide direction. While US stocks posted modest gains (the S&P500 rose 0.3%), the Shanghai index fell 3%. Weakness in Asian stocks saw risk aversion increase. The VIX index (an index of stock market volatility used as a proxy for risk aversion) lifted off 1-year lows to around 24%. The slight paring in of risk appetite helped the USD index gain around 0.2% on Friday night. With the negative sentiment towards the USD taking a breather on Friday, many of the major currencies eased off recent highs. AUD washed off around 1 cent from the 13-month high reached on Thursday of around 0.8775. Similarly, EUR slipped to around 1.4700 from one-year highs around 1.4760 earlier in the week. USD/JPY rose to 91.30 following comments from Japanese Finance Minister Fuji who said he did want to be perceived as backing a strong yen. The GBP/USD was the weakest performing currency last week falling over 2%, despite an environment of generalised USD weakness. The GBP has been hit by ongoing banking sector concerns and sharp falls in interest rates, as central bank and government officials have intimated that official interest rates may need to be lowered (or even made negative). Friday's public sector borrowing figures, while slightly better than expectations, underlined concerns about the UK economy. Net public sector borrowing was £16.1billion in August, £6.2 billion higher than the same time a year earlier. Looking ahead to this week, we suspect USD sentiment may well remain in the doldrums. Ongoing signs the global economic recovery is in train should support risk appetite, while a sustained rise in US interest rates still looks like a 2010 story to us. However, market participants may be reluctant to put their cards on the table ahead of the FOMC meeting on Wednesday. While the meeting should be fairly uneventful, any signs the Fed is looking to end their asset purchase scheme sooner rather than later could lift US interest rates, providing support to the USD. Other events to watch out for this week include European PMIs and the Bank of England's September MPC minutes also on Wednesday, and the German IFO survey on Thursday. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.