Opinion: Risk NZ$ will fall vs Aussie$ if RBA hikes official rate in 09
31st Aug 09, 9:36am
By Danica Hampton Friday night was a choppy session for the NZD/USD. The local currency was catapulted towards 0.6900 in the immediate wake of the US data, as the knee-jerk reaction saw equities and risk appetite rebound. But the optimism was short-lived. Investors quickly reassessed the outlook for US consumption and US equities erased earlier gains. Once again, heavy NZD selling was noted ahead of rumoured 0.6900 option barriers and the correction in equity markets also encouraged a wave of NZD/JPY supply. Steady selling of NZD against AUD also weighed on NZD/USD. After climbing to nearly 0.8250 in the middle of last week, NZD/AUD has slipped below 0.8150. It seems that this week's impending RBA meeting has encouraged many investors to rebuild long AUD positions. We continue to see downside risks to NZD/AUD near-term. Market pricing is consistent with at least one 25bps hike from the RBA by year-end following signs of strength in Australian domestic demand and comments from RBA officials cautioning against keeping rates too low for too long. In contrast, the RBNZ has declared its intention to keep the OCR at, or below, its current level until well into 2010, and markets are currently pricing around a 50% chance of an RBNZ hike in January next year (our official view has the first OCR hike coming in July). We look for a correction back towards 0.7900-0.8000 in coming months. The NZD/USD spent last week trading within a relatively tight 0.6775-0.6900 range as investor sentiment waxed and waned. While the global backdrop certainly seems to be improving, markets seem wary of getting overly excited about the strength and timing of the anticipated global recovery. The coming week is full of global event risk "“ including Japan's election result, RBA and ECB central bank meetings, US non-farm payrolls and the G20 Finance Ministers meeting "“ which should held shed some light on the global outlook. However, option-related activity looks likely to keep most major currencies range bound again this week. For NZD/USD, heavy option-related selling ahead of reported barriers at 0.6900 has firmly capped the topside and we expect this to continue again this week. Initial support is seen ahead of last week's 0.6775 low, but the risk of a deeper correction towards 0.6650-0.6700 seems to be building. In a quiet NZ data week, Monday's National Bank survey will be a crucial check on whether the better than expected improvements seen in July's survey overstated the case for a sustainable recovery of the NZ economy. Meanwhile, Thursday's release of the ANZ commodity price index will likely illustrate that the recent gains in NZ dairy prices have been offset by the rapid rise in the NZD/USD. The USD firmed against all the major currencies on Friday night, as mixed economic data and flat equity markets left investors guessing on the underlying health of the global economy. Friday's US data raised doubts over the outlook for US consumption and the pace of the anticipated US economic recovery. The University of Michigan Consumer Confidence survey was finalised at 65.7 for August, its lowest level since April. Household incomes were flat in July (following a sharp fall in June) and personal spending inched up 0.2%m/m (largely thanks to the governments "cash-for-clunkers" program). Worries about US consumption weighed on Wall Street, despite upbeat reports from technology bellwethers Intel and Dell. The S&P500 fell 0.2% on Friday, but finished the week more or less flat. EUR/USD spent most of last week trading choppily within a 1.4200-1.4400 range. Activity from quasi-sovereign accounts reportedly kept the currency range bound, which may be related to large option structures with 1.3950-1.4450 strikes. Data out of the Eurozone has tended to surprise on the upside. Friday's release of the European Commission's monthly survey showed that economic sentiment in the region rose to 80.6 points in August, up from July's 76.0, the fifth straight gain. 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 somewhat. This week is full of event risk, which should help shed some light on the global outlook and risk appetite. It starts with Japan's election result on Monday (the polls suggest that the opposition Democrats will win in a landslide and oust the incumbent LDP) and will finish with Friday's US non-farm payrolls and the G20 Finance Ministers meeting at the weekend. In between times, both the RBA and ECB are also scheduled to meet and there is a string of US and European data (including manufacturing ISM in the US and European PMIs and GDP). While there is plenty of data due out 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.