Opinion: Stronger US manufacturing news bolsters Kiwi$

By Danica Hampton NZD/USD spent the night trading choppily within a 0.6790-0.6870 range. Early on, fears about the global outlook put NZD under selling pressure. Media reports suggesting Chinese State Owned Enterprises may terminate commodity contracts weighed heavily on equity and commodity prices (the Shanghai index fell 6.7% and the CRB Index dropped about 2%). Investors were quick to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD. Japan's election results (where the Democratic Party won by a landslide) also helped support JPY, which added to the downward pressure on NZD/JPY. NZD/JPY slipped from above 64.00 to nearly 63.00 and NZD/USD was dragged below 0.6800. However, the NZD/USD weakness was short-lived. Stronger-than-expected US manufacturing data helped lift investor sentiment a little. EUR/USD spiked from around 1.4260 to 1.4360 and this paved the way for a more generalised wave of USD selling. Before long, NZD/USD had rebounded back above 0.6850. Yesterday's unequivocally buoyant National Bank Business Outlook (NBBO) probably helped underpin NZD sentiment. Not only did it suggest the NZ recession is fast nearing an end, but the "own-activity" indicator was consistent with GDP heading back towards trend. While we don't think the NBBO will have the RBNZ scurrying to push interest rates higher (particularly given the NZD is doing more than its fair share of returning monetary conditions to more neutral levels), it was probably strong enough to prevent further rate cuts. The next focus will be the RBA decision (due 4:30pm). The RBA is widely expected to leave rates unchanged at 3.00%. In fact, an article from noted RBA watcher, Terry McCrann, said there was "absolutely no prospect of a "˜surprise' rate rise". However, the accompanying statement will be closely eyed for clues as to when the RBA will start raising rates. For today, we suspect the topside in NZD/USD will be limited to the 0.6880-0.6900 region. Initial support is seen ahead of last week's 0.6775 low. It was a night of two halves in financial markets. Through the first half of the night, the USD firmed as worries about the global outlook saw investors ditch growth sensitive currencies. Media reports suggesting Chinese State Owned Enterprises (SoEs) may terminate commodity contracts saw Chinese equities fall sharply and commodity prices nose-dive. The Shanghai index fell 6.7% and the CRB Index (a broad measure of commodity prices) has fallen 2% in the past 24 hours. Crude oil prices dropped about US$3 and fell below US$70/barrel for the first time in more than a week. Japan's landslide election victory (where the Democratic Party ousted the incumbent LDP Party) was seen as positive for Japan's outlook and this saw JPY appreciate. USD/JPY fell sharply from above 93.50 to nearly 92.50. The generally firmer JPY provided further motivation for investors to unwind "risk appetite" trades and JPY crosses fell heavily. EUR/JPY slipped from above 133.50 to nearly 132.00 and EUR/USD was dragged down to around 1.4260. However, the USD strength didn't last. The second half of the night saw EUR/USD spike sharply from around 1.4260 to 1.4360. It's difficult to pinpoint the exact reasons for the change in sentiment. Some USD selling was noted at the London fix (probably related to month-end portfolio flows), but better-than-expected US manufacturing data also probably helped lift sentiment. The Chicago PMI rose to 50.0 in August (vs. 48 forecast) and the Dallas Fed manufacturing index rose to -9.1% (vs. -14% forecast). However, Canadian GDP disappointed (it fell at an annualised paced of 3.4% in Q2 vs. -3.0% forecast) and global equities remain weak. European equities shed about 1% and the S&P500 is currently down 1.1%. The major currencies have spent the past few weeks trading choppily within familiar ranges as investors have tried to figure out the global economic outlook. Recent data suggests the world is on track to start expanding again in late 2009/early 2010. However, expectations that global growth will remain below average for years to come has curbed optimism a tad. This week's economic data (including Eurozone GDP, US manufacturing and services ISMs, and US non-farm payrolls) should help shed some light on the global outlook. While there is plenty to keep an eye on data-wise this week, strong option-related interest will likely make it difficult for currencies to break out of recent ranges near-term. This means EUR/USD will likely continue to struggle towards 1.4450 and the USD Index will likely find solid support on dips towards 77.50. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.