Opinion: Why the Kiwi$ is not out of the woods yet

By Danica Hampton NZD/USD pretty much spent the night consolidating within a 0.6720-0.6780 range. There was little in the way of fresh news last night. The US economic data was mixed "“ the Philadelphia manufacturing index showed a pick-up in activity, but the number of Americans filing for unemployment benefits continues to rise. Although GBP/USD did fall sharply from 1.6600 to nearly 1.6450 after public sector finance data highlighted the dire state of the UK government's coffers. However, global equities firmed a little last night and this helped underpin risk appetite and growth sensitive currencies like NZD/USD. The Shanghai index rose 4.5%, European indices rose about 1.5% and the S&P500 is currently up 1%. It's been a fairly wild week in currency markets. Lacklustre US consumer confidence data and heavy losses in Chinese equities (the Shanghai index is still down about 15% from its early August highs) sparked concern about the global recovery. As risk aversion escalated, NZD/USD was knocked below 0.6650. While we've seen some stabilisation (in both NZD/USD and global sentiment) as the week progressed, it's premature to conclude we're out of the woods just yet. After rallying about 50% from the March lows, many offshore equity markets still look stretched relative to valuations. Nor should we forget that the reduced availability of credit and the massive fiscal debt burden will mean that investors will have to adjust to a slower pace of "average" global growth in the future. Any further reassessment over the timing and strength of the global recovery will likely spark a further modest correction in equity and/or commodity prices. Such a correction, would pose some downside risks to NZD/USD. In the near-term, given the uncertainty about the global recovery, expect the fortunes of NZD/USD to remain closely tied to the performance of global equities. For today, the backdrop of firmer equity markets should keep NZD/USD trading within a familiar 0.6730-0.6800 range. Consolidation was the main theme in currency markets overnight. A real mixed bag of data meant that most of the majors tracked in narrow ranges. UK retail sales met expectations for a small (0.4% rise). But public sector borrowing figures were woeful. The UK Government posted a deficit of £8 billion, driven by plunging tax receipts, now down over 15% on a year ago. The figures raised fears that a future retrenchment in UK public spending and/or tax increases could present a major hurdle for the UK recovery. As a result, the GBP/USD was sold from around 1.6+00 to 1.6460 in a short space of time. The GBP weakness initially weighed on growth sensitive currencies like the AUD and NZD. However, these moves were soon unwound as modest gains in US stocks saw optimism return. The Philadelphia Fed index survey reading of 4.2 was above market expectations and indicative of expansion in the mid-Atlantic manufacturing sector for the first time in 10 months. Despite marginally higher-than-expected US jobless claims filings, US stocks managed another day of modest gains, helped by a strong rebound in Asian stocks (the Shanghai index recovered 4.5%). Looking back over the past week or so, it is clear that nothing really has changed. The global backdrop has materially improved over the past few months and markets expect this to continue. Undeniably, the outlook for global growth in 2010 is much brighter than it was for 2009. However, markets are at risk of getting overly optimistic on the speed and strength of the global economic recovery and so volatility will remain. Overall, we think the reduced availability of credit (not to mention its higher cost) and the massive fiscal debt burden will mean that investors will have to a get used to a slower pace of "average" global growth in future. As investors continue to reassess the timing and strength of the global recovery, we expect to see short-lived patches of weakness in equity and commodity prices (like we've seen this week in the Shanghai indices). The focus for currency markets over the weekend will be the Federal Reserves annual Jackson Hole conference for central bankers. Fed chairman Bernanke is delivering a speech entitled "Reflections on a Year of Crisis", which will be watched closely for clues on future Fed actions. For today, we suspect the USD will remain contained in familiar ranges. Near-term support looks to be holding around 78.00 for now. On the topside, resistance is eyed around 79.20. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.