Opinion: NZ$ likely to fall back to 66 USc range this week

By Danica Hampton The past week has been a bit of a wild ride for NZD/USD and Friday night was no exception. Solid demand for both NZD and AUD from a mixture of short-term speculative players and model accounts propelled NZD/USD to near on an 11-month high of just over 0.6880 early on Friday night. However, disappointing US data (University of Michigan consumer confidence slipped to 63.2 in August, well down on the 69.0 forecast) and faltering equity markets saw NZD/USD knocked from its highs. Investors are starting to reassess the strength and timing of the anticipated global recovery. Friday's lacklustre US consumer confidence data has cast doubts over whether consumer spending will be able to lead the US out of recession. Meantime, many investors are concerned that Chinese growth will struggle as the government clamps down on lending in order to prevent asset bubbles. As worries about the global economy resurfaced, growth sensitive assets have struggled. The S&P500 finished the week down 0.6%, while the Shanghai index fell 6.5%. The CRB Index, a broad measure of commodity prices, slipped nearly 3%. Unsurprisingly, growth sensitive currencies like NZD, CAD and AUD fell heavily against "safe-haven" currencies like the USD and JPY. It's worth noting, the "fair value" level implied by our short-term valuation model climbed to 0.6600-0.6900 last week. The widening of NZ-US 3-year swap spreads (which nudged out 23bps to 2.77%) and slight firming of NZ commodity prices helped offset the moderation seen in risk appetite. For the coming week, with global growth expectations and risk appetite now starting to look a little shaky, NZD/USD looks vulnerable to a correction lower. This week's string of second tier NZ data releases (including July's Performance of services index, PPI, National Bank's regional trend survey) are unlikely to have a material influence on NZD sentiment. We suspect NZD/USD will struggle to break above last week's 0.6880 high and look for a correction back towards the 0.6600 region. Strength in the USD and JPY was the order of the day on Friday night, as surprising weakness in US consumer sentiment spurred fears markets may have overestimated the strength of the global economic recovery. While Friday's US CPI was more or less in line with analyst expectations, the University of Michigan consumer confidence data was pretty awful. The survey dipped to 63.2 in August (from 66 in July), well below the consensus forecast of an increase to 69. Wall Street reacted badly to the news the US consumer is perhaps not as healthy as many predicted. The S&P 500 fell 0.9% on Friday - its first weekly decline in 5 weeks. Weakness in stocks and heightened fears about the global economic recovery saw risk trades unwound, helping spur broad-based strength in the USD and JPY. As a result, the EUR/USD fell to around 1.42 from 1.43, while the AUD washed off around a cent to 83.30. Sentiment towards commodity currencies such as the AUD, NZD and CAD was further dented by a 3% fall in the CRB commodity price index and a nearly 4.5% fall in oil prices. Overall, it seems markets took a bit of a reality check last week. Doubts over whether the US consumer and the Chinese economy in particular can sustain the sort of recovery that is priced into markets tended to dominate. Of note, the Shanghai composite index fell 6.5% last week "“ the largest weekly fall this year. "Safe-haven" currencies such as the JPY and CHF were generally the best performers over the week. Any talk, as was the case at the start of the week, that fundamentals would soon take over from risk and equities correlations as currency drivers was soon forgotten. For this week, we suspect markets' ongoing reassessment of global growth expectations and some easing in risk appetite should provide further support to safe-haven currencies like the JPY and the USD. For the USD Index, a re-test of recent highs around 79.30 looks likely. The real test will be whether or not the USD Index manages to break convincingly above this level. If so, growth sensitive currencies such as the NZD and AUD will struggle to push higher. The data schedule this week is reasonably light. Nevertheless, further clues on the strength of the European outlook will be available in the form of the German ZEW survey due out on Tuesday and the suite of European PMIs due out on Friday. In the US, markets' main focus will be on the Philly Fed index on Thursday and existing home sales data on Friday. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.