Opinion: Escalating trade tensions knock global investor confidence
15th Sep 09, 9:13am
By Danica Hampton The NZD/USD started the week on a fragile footing. Escalating trade tensions between China and the US knocked investor confidence yesterday. A slide in Asian equities and weaker commodity prices simply added to the risk adverse climate. Before long, investors were ditching growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. NZD/JPY fell from above 64.00 to nearly 63.00 and NZD/USD was dragged below 0.6970. Yesterday's weaker-than-expected retail sales didn't help NZD sentiment. Sales fell a hefty 0.5%m/m in July, worse than the 0.5% gain expected by the market. While we remain relatively positive on NZ's longer-term outlook, July's data serves as a reminder than an improving housing market (affirmed by yesterday's REINZ figures) and rebounding business and consumer confidence means very little for retailers if households are not spending.' Undeniably, NZ fundamentals have improved over recent months. Our short-term valuation model suggests a "˜fair value' range for the NZD/USD of 0.6850-0.7050. However, this does suggests there is no fundamental reason for NZD/USD to sustain bounces above 0.7050 (this is further reinforced by the downside risks we see on to NZ-US interest rate spreads due to our less hawkish view of RBNZ policy). Further clues on NZ's fundamental outlook will come from today's Q2 manufacturing data - one of the last partial indicators to feed into our Q2 GDP forecasts. The manufacturing sales headline won't mean a lot, but once the economists have adjusted sales for the change in inventories we're expecting a modest drop in manufacturing value-added (reflecting a general shrinkage in the sector and a decline in meat slaughtering). Be aware, that a positive surprise in manufacturing value-added could see Q2 GDP forecasts revised into positive territory. Across the Tasman, keep an eye out for the RBA minutes (due 1:30pm) for further clues on the likely timing of the much anticipated first rate hike. For today, expect headwinds around 0.7050. Initial support is eyed ahead of 0.6950. A daily close below 0.6900 is needed to suggest a deeper correction is on the cards. The USD has strengthened over the past 24 hours as the start of the week has been dominated by risk aversion. Growing concern about trade tensions between China and the US dented investor confidence yesterday. Modest losses across Asian equities added to the air of risk aversion; the Hang Seng slipped 1.08% and the Nikkei fell 2.3%. Commodity prices also tumbled. The CRB Index, a broad measure of commodity prices, has fallen about 1.5% since the start of the week. Against a backdrop of tempered risk appetite and softer commodities prices, investors ditched growth sensitive currencies like NZD, AUD, GBP and EUR in favour of the relative safety of the USD. EUR/USD slipped from 1.4600 to a smidge below 1.4520 and GBP/USD fell from above 1.6680 to nearly 1.6520. However, the weakness in EUR/USD didn't last. The European Commission posted a fairly upbeat assessment on the Eurozone which, combined with heavy EUR/GBP demand, was enough to see EUR/USD rebound from below 1.4550 to above 1.4650. The European Commission said the "EU economy appears to be at a turning point" and it revised up its 2010 GDP forecasts from -0.1% to +0.4%. In contrast, GBP remained heavy throughout the night - falling against both the USD and EUR. GBP was weighed down by a Moody's report that said the outlook for UK banks would remain negative for the next 12-18 months. A European Commission report saying the British economy would contract by more than previously thought in 2009 did little to help GBP sentiment. More generally, investors remain cautious on GBP ahead of Bank of England (BoE) Governor King's testimony to lawmakers on Tuesday. King is likely to face questions about the outlook for the BoE's quantitative easing program. Despite the risk aversion evident in other markets, US bond yields inched higher last night as investors locked in profits after a 5-week rally. US 10-year yields rose 6bps to 3.40% last night. Investors are growing cautious about whether officials will ramp up overtures about the recent USD weakness (both the Swiss National Bank and Bank of Japan meet this week). After all, policy makers worldwide do not generally want a dramatically weaker USD. This week's US data should help determine whether US interest rates will continue to slide lower and whether the September rebound in equity markets can persist "“ providing useful clues for the direction of the USD. On the USD Index, initial support is seen around 76.50 ahead of deeper support at 75.90-76.00. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.