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Opinion: NZ$ up to 82 Aussie cents as news from China hits AU$

Opinion: NZ$ up to 82 Aussie cents as news from China hits AU$

By Mike Jones The NZD has spend the last 24 hours chopping around in a familiar 0.6800 "“ 0.6890 range. Early in the night, improving risk appetite and growing confidence in the global outlook saw growth sensitive currencies outperform. US new home sales and durable goods orders were both much stronger than the market had anticipated. Meanwhile, the closely watched German IFO business confidence gauge also exceeded expectations. As a result, the NZD was initially squeezed up towards 0.6900. However, news that Chinese officials plan to "curb excessive investment in sectors facing over capacity" subsequently stoked fears about the Chinese recovery. These comments, along with small falls in US and European stocks tended to weigh on risk appetite, and investors ditched growth sensitive currencies like NZD in favour of the safe have appeal of the USD. The strengthening USD saw the NZD eventually returned to levels close to 0.6800. With the Chinese comments tending to weigh more heavily on the AUD, NZD/AUD scaled new highs around 0.8200 overnight. At these levels NZD/AUD looks overstretched to us. Markets have recently moved to price in at least one hike from the RBA by year-end. 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. The contrasting outlooks for monetary policy has seen NZ-AU interest rate spreads narrow around 45 basis points in the past month or so, which should weigh on NZD/AUD going forward. We believe NZD/AUD remains vulnerable to a near-term correction back towards 0.7900-0.8000 in coming months. With uncertainty about the global outlook continuing to pervade markets, we suspect NZD/USD is at risk of further downside today. Keep a close eye on Chinese equities today for the reaction to official comments regarding limiting overcapacity. Weakness in the Shanghai index could see NZD test support around 0.6750. NZ merchandise trade figures for July are also due to be released today. Broad-based US dollar strength was the main theme in currency markets overnight. This was despite more evidence the global economy remains in recovery mode. Last night's batch of US data was on the whole much more positive than analysts were expecting. US new home sales surged 9.6% in July, the largest increase since February 2005, and much stronger than the 1.6% expected. Similarly, US durable goods orders for July increased 4.9%, easily outstripping expectations of a 3% gain. The stronger data saw US equity markets initially open higher "“ the S&P 500 was up 0.5% at one stage. However, these gains were erased (the S&P is currently around flat) after Chinese officials were quoted as saying China plans to take steps to "curb excessive investment in sectors facing over capacity". Markets' downbeat assessment of a speech by the Fed's Lockhart also weighed on sentiment. Lockhart noted that the US recovery will be constrained somewhat by rising unemployment and suggested "it is too early to be contemplating a rise in the Fed Funds rate". The comments from Chinese officials stoked fears that official intervention could hamper the Chinese recovery. These fears, combined with Wall St's poor performance tended to weigh on risk appetite, prompting investors to seek out the relative "safe haven" of the USD and JPY. As a result, all of the major currencies depreciated against the US dollar overnight. Currency weakness was most marked in growth sensitive currencies like NZD and AUD. The AUD in particular seemed to be most affected by the comments from China. Heavy AUD selling from short-term speculative players and model accounts pushed AUD down to around 0.8280, having popped above 0.8400 the previous day. Falls in EUR were limited to some extent following the slightly better-than-expected German IFO business confidence index (90.5 vs. 89.0 expected). The GBP has been one of the weakest performing currencies this week following concerns the BOE's quantitative easing measures are not having the desired effect on the economy. Decent GBP selling continued last night as UK government bond yields fell to record lows (2-year Gilts are trading around 0.9%), dragging GBP to around 1.6240. For today, we suspect some easing in risk appetite will limit the downside on the USD index. Solid support is seen around 78.00 "“ 78.20 on the DXY index. * All of the research produced by the BNZ Capital team of economists is available here.

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