By Danica Hampton NZD/USD has slipped just under a cent over the past 24 hours, as worries about the global outlook and risk aversion resurfaced. On balance, yesterday's batch of Chinese data was a touch weaker than most expected (retail sales more or less met expectations, but industrial production rose just 10.8%y/y versus 11.5% expected). It served as a reminder that the path to global recovery may not be as rapid as many are anticipating. Renewed concern about the global outlook took a toll on both equity markets and commodity prices. The CRB Index, a broad measure of commodity prices, slipped 0.8% overnight. European equities fell 1-2.5% and the S&P500 is currently down 1.2%. Against a backdrop of weaker global equities and rising risk aversion, JPY was the strongest performing currency as investors flocked back into "safe haven" assets. In contrast, growth sensitive currencies such as the NZD and AUD were sold heavily. Custodial accounts and short-term speculative players were noted sellers of NZD (and NZD/JPY) last night. NZD/JPY fell about 2% from above 65.50 to below 64.00 and NZD/USD was dragged down below 0.6700.
Meanwhile, the USD remains caught in a sideways shuffle as investors appear reluctant to place large bets on the USD before the FOMC meeting tomorrow. There is little in the way of domestic data to watch out for over the next few days. And with investors comfortable on the sidelines ahead of the FOMC, we are inclined to think NZD/USD will continue to play familiar ranges in the near-term. Barring a major melt-down in Asian equities, we suspect dips will be limited to 0.6625. On the topside, the NZD/USD is likely to encounter resistance around 0.6730. The USD shuffled sideways last night, but worries about the global outlook and risk aversion saw the JPY strengthen against growth sensitive currencies like NZD and AUD. Yesterday's Chinese data was fairly uninspiring "“ July's industrial production rose 10.8%y/y (vs. 11.5% forecast) and fixed asset investment rose 32.9%y/y (vs. 34.0% forecast). The disappointing growth in factory output and investment served as a reminder that the Chinese economy may not be recovering as quickly as many had hoped. As worries about the global outlook resurfaced, this took a toll commodity prices. Overnight, the CRB index (a broad measure of commodity prices) fell 0.75% and the Baltic Dry Index (an indicator of international shipping and freight activity) slipped 2.4%. As widely expected, the Bank of Japan (BoJ) left rates unchanged at 0.1% yesterday. BoJ Governor Shirakawa warned that deflation pressures could persist even after Japan emerges from recession and made it clear that it may be a long time before its policy rate moves higher. Global equities slipped last night, weighed down by renewed fears about the global recovery and profit-taking ahead of Thursday's FOMC meeting. Worries about the Financial Accounting Standards Board (FASB) bringing back mark-to-market accounting also clouded sentiment. Financial stocks remained heavy, led by double digit losses in AIG and commercial lender CIT Group. European equity indices fell 1-2.5% and the S&P500 is currently down 1.2%. In currency markets, weaker commodity prices and risk aversion saw investors ditch growth sensitive currencies like NZD, AUD and CAD in favour of the relative safety of JPY and CHF. JPY was really the stand-out performer "“ gaining more than 1% against the USD as USD/JPY slipped from around 97.00 to below 95.80. The next key event will be the FOMC decision (due 6:15am Thursday morning). While no one is expecting the Fed to change its official policy setting, the accompanying statement will be closely monitored for changes to their economic outlook. In light of the recent string of better-than-expected US economic data, many investors will be looking for clues on how the Fed plans to tighten monetary policy. However, we still think it's premature to be looking for any hints on how the Fed is planning to exit quantitative easing program. As such, we suspect the USD Index will struggle to break above the 79.66 high reached on July 29. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.