Opinion: NZ$ treads water ahead of RBNZ decision next Thursday (corrected)

By Mike Jones The NZD has spend the past few days mooching around in a 0.6600-0.6700 0.6700-0.6800 range. (Corrected first sentence.) It was another choppy night in currency markets overnight as investors continue to weigh up global prospects for the next year or so. Nevertheless, while US data was a little mixed, US stocks managed to eke out small gains as several US retailers posted better-than-expected August sales results. The Shanghai index offset losses earlier this week by notching up a whopping 4.8% gain. And PMI data out of Europe and the UK was generally on the firmer side of expectations, suggestive of a return to growth for the manufacturing sector later this year. All this served to lift investors' risk appetite. Growth sensitive currencies like the NZD and AUD outperformed overnight as investors pared back "safe-haven" positions in JPY and USD. As a result, NZD edged steadily higher. Upon hitting stop-loss orders around 0.6800 (orders to buy back NZD from investors who were "short") the NZD was briefly pitched above 0.6820 before a late USD rally saw NZD settle around 0.6770. Yesterday's upbeat commodity price data may have also underpinned the NZD overnight. World prices for NZ's exports lifted a robust 4.2% in August. However, in local-currency terms, prices were pretty much flat, including for dairy products. It's just another reminder the steady march higher in the NZD may take a toll on export returns. For today, we suspect another day of consolidation is in order. With little in the way of data out either locally or across the Tasman, it seems the NZD will struggle to break out of its 0.6700-0.6850 range. US payrolls data out tonight may have implications for the USD and therefore the NZD. But it is next week's RBNZ September Monetary Policy Statement that is likely to be the next key test for the NZD. Growth sensitive currencies have outperformed over the past 24 hours, as risk appetite firmed. On balance, US data released overnight was a tad disappointing. While the ISM non-manufacturing index more or less met expectations for a small gain, the number of jobless claims was a bit higher than the market was looking for. However, several retailers, including Costco and Target, posted higher-than-expected August sales results. And as a result, US stocks managed to post modest gains. The S&P 500 is up around 0.9%. The Shanghai index yesterday surged 4.8%, clawing back most of the losses incurred earlier in the week. The generally positive performance across global equity markets (with the exception of small losses in European stocks) boosted risk appetite, increasing demand for growth sensitive currencies like AUD, NZD and CAD. As "safe-haven" positions were pared back, JPY fell out of favour and USD/JPY bounced off yesterday's 7-month low. GBP temporarily popped above 1.6400 as strong August PMI services data raised hopes of a return to growth in Q3 for the UK. Against this backdrop, EUR underperformed. At its meeting overnight, the ECB left its key policy rate unchanged at 1%, as widely expected. ECB president Trichet said the Eurozone faces a gradual recovery and stressed it was too early to contemplate an end to the ECB's various monetary easing measures. The prospect of the ECB on hold for longer saw Eurozone 2 year bond yields fall by about 7 bps to around 1.14% and EUR was swiftly knocked from 1.4340 to around 1.4260. However, better-than-expected Eurozone data helped limit EUR's losses. The composite PMI rose to 50.4 in August (vs. 50.0 forecast). The Riksbank left interest rates unchanged at 0.25%, but the dovish tone of the accompanying statement saw USD/SEK rise nearly 1% to 7.2500. Looking ahead, the main focus for markets tonight will be US non-farm payrolls data. Recall last month's better-than-expected payrolls report resulted in some surprising USD strength (instead of the usual good news sell off) as hopes about a US economic recovery saw bond yields spike higher. It will take a dramatic surprise (expectations are for a 230,000 drop) to shunt the USD index out of the 77.80-79.00 range it's held over the past fortnight. For the EUR, initial support is eyed around the recent 1.4180 low, while resistance is around 1.4360. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.