Opinion: Little reason for NZ$ to stay at 12 yr high against the Pound

By Danica Hampton NZD/USD flirted with its year-to-date high last night, rising to nearly 0.6890 before gradually easing lower. Early in the night, improving risk appetite and growing confidence in the global outlook saw growth sensitive currencies outperform. The NZD has been one of the strongest performing currencies over the past 24 hours "“ falling only against the CAD which benefited from the stronger-than-expected Canadian retail sales data. Despite the initial optimism, there was still some caution evident in the major currencies. Gnawing concern about rising public debt in the UK (highlighted by several media articles) saw GBP/USD skid from above 1.6500 to below 1.6400, while EUR/USD slipped from around 1.4350 to below 1.4300. While European equities rallied about 1%, Wall Street posted small losses and this also helped temper risk appetite as the night progressed. The diverging paths of NZD and GBP has seen NZD/GBP push to nearly 0.4190 "“ its highest level since mid 1997. However, we don't think there is a compelling reason for NZD to continue to outperform GBP. Policy makers in both NZ and UK have taken dramatic action over the past year or so "“ liberally applying both monetary and fiscal stimulus. Both economies are now starting to reap the rewards and are starting to claw their way out of recession. Sure, as a commodity exporting nation, the NZ economy (and hence the NZD) should benefit more from improving global growth. However, NZD/GBP is already sitting well above the levels seen at the height of the global boom in early 2007. We suspect bounces above 0.4150 will prove unsustainable and look for NZD/GBP to sink back towards 0.3900-0.4000 in coming months. For today, with little clear direction coming from the global backdrop, we suspect NZD/USD will tread water within familiar ranges. Headwinds are expected towards 0.6880-0.6890, while initial support is seen around 0.6800-0.6810. Developments in currency markets over the past 24 hours are best described as a bit of a mish-mash. The main mover overnight was the GBP, which was sold heavily from above 1.6500 to just under 1.6400. While there was no specific news or data to point to, sentiment towards GBP has been hit by a barrage of media articles pointing out the risks around the UK economic outlook, concern over burgeoning public debt and expressing fears over how the economy will fare once government support and quantitative easing are eventually withdrawn. The widespread GBP/USD selling paved the way for a mild firming in the USD, which tended to weigh on other currencies such as the EUR and JPY. Despite some stronger-than-expected data (industrial orders increased 3.1% vs. expectations of 1.8%), EUR dipped below 1.4300, helped lower by a mild bout of profit taking after four days of gains. USD/JPY eased back to 94.50 from around 95.00. While EUR and GBP slipped against the USD, growth sensitive currencies like CAD, NZD and AUD bucked the trend and rose modestly. For the most part, it seems that improving risk appetite and growing confidence in the global outlook helped lift these commodity currencies. However, the CAD was also underpinned by stronger-than-expected retail sales, which rose 1% in June (well above the 0.2% forecast by economists). Commodity prices posted modest gains last night. The CRB index (a broad index of commodity prices) increased nearly 1% and oil prices remain at 10-month highs around US$74/ barrel. However, global equity markets were a little mixed. European equities rose about 1%, while Wall Street has chalked up small losses. For today, with little in the way of clear direction coming from economic data or global equity markets, we suspect some consolidation is in order for the major currencies. But looking ahead, while investors remain convinced the global economy is on the road to recovery and risk appetite remains buoyant, we'd expect the USD to remain heavy. On the USD Index, this suggests a push back towards 77.50 is on the cards in coming weeks. Keep an eye out for tonight's US Case-Shiller house price index and the second estimate of German Q2 GDP for further clues on the global outlook. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.