Opinion: Kiwi$ to be closely linked to performance on Wall st.

Opinion: Kiwi$ to be closely linked to performance on Wall st.
By Danica Hampton It's been a topsy-turvy 24 hours for NZD/USD. The local currency has been whipped about by changes in global sentiment and risk appetite as investors watched the fortunes of global equity markets. After climbing above 0.6750 yesterday morning, the NZD/USD skidded back to nearly 0.6660 as the day wore on. The Shanghai stock market tumbled 4.3% and the Chinese central bank (PBOC) took measures to strengthen the CNY in order to slow growth. This revived concern about the global recovery and investors ditched growth sensitive currencies like the NZD in favour of the relatively safety of the USD. GBP/USD slipped after the Bank of England Minutes and this added to the downward pressure on NZD/USD. The Minutes showed that three members voted for an even larger expansion of the UK's asset purchase program (it was expanded by £50b but three voted for £75b). However, the NZD/USD weakness didn't persist. A mix of commercial and investor accounts continue to show an appetite for NZD and AUD on dips. And a stabilisation in European and US equity markets saw the USD weaken as investors trimmed back some of their "safe-haven" positions. Before long, NZD/USD had pushed back above 0.6750. In the near-term, given the uncertainty about the global recovery, we suspect investors will continue to look to global equities for a barometer of risk appetite. As such, the near-term fortunes of the NZD/USD will remain closely tied to the performance of global equities. For today, we suspect NZD/USD will struggle to break above 0.6780. Solid support is eyed around 0.6645, but a break below this level will open up the downside towards 0.6590. It has been a volatile night in currency markets. Another poor day in Asian equity markets initially stoked fears about the strength of the global recovery. The Shanghai stock index plunged another 4.3% yesterday (to the lowest level in two months) while the Nikkei fell 0.8% and the Hang Seng was down around 1.5%. The weakness in stocks dented investors' risk appetite, prompting broad-based strength in "safe-haven" currencies like the JPY. Indeed, the USD/JPY fell to a one-month low around 93.60 overnight. Adding to the negative sentiment, the release of the Bank of England's August MPC minutes revealed a weaker-than-expected assessment of the UK economy. The minutes showed a 6-3 vote in favour of the £50 billion extension to QE purchases but with the minority wanting an even larger £75 billion increase (with the Governor himself on the losing side). This prompted a sharp sell off in GBP/USD, which hit an overnight low around 1.6380. However, negative sentiment soon abated as US stocks chalked up modest gains. A near 5% rebound in oil prices provided a boost for US energy stocks, while better-than-expected earnings results from John Deere also supported. Meanwhile, US mortgage applications rose for a third straight week (by 5.6%) taking the market by surprise (expectations were for a fall). The Dow and the S&P 500 are both currently up around 0.6%. As US stocks firmed, risk appetite recovered. The USD weakened against most major currencies as investors pared back "safe haven" trades. As a result, most of majors retraced earlier falls and are sitting at similar levels to 24 hours ago. The GBP/USD recovered to around 1.6530, while AUD and NZD are sitting back around 0.8270 and 0.6730 respectively (Asian central banks were again noted buyers of AUD and NZD overnight). The CAD and EUR are the only exceptions which are both stronger following the gains in oil prices. With little data out to excite markets over the remainder of the week, the focus will remain on equity markets as a gauge of global sentiment. As such, keep an eye on Asian equity markets today. Further weakness could boost safe haven demand for the USD, prompting some retracement of last night's weakness. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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