Opinion: NZ$ down from 68 USc as hopes of US recovery boosts US$ (Update 1)

By Danica Hampton Friday was a volatile night for NZD/USD. (Update 1: NZD/USD opened on Monday morning around 0.6690.) Anticipation of upbeat US non-farm payrolls data initially saw NZD/USD well supported. The release did not disappoint "“ jobs fell just 247,000 in July vs. 325,000 forecast and the unemployment rate fell for the first time in 15 months to 9.4%. NZD/USD spiked in the wake of the release and stop-loss buying saw the currency pushed the currency to a fresh 10-month high above 0.6800. However, the NZD/USD strength didn't last. A sharp rise in US interest rates (10-year bond yields rose 10bps to 3.85%) gave the USD a major boost as investors became more convinced the US will lead the global recovery rather than drag it down. The USD Index rose 1.5% and NZD/USD was knocked back towards 0.6700. The real question this week is whether or not this shift to buying USD on relatively better US economic news continues. This week's US data includes retail sales and industrial production, but the key event will probably be the FOMC decision. While the US data has tended to surprise on the upside, we suspect those looking for hints as to when and how the FOMC will exit it quantitative easing program will be disappointed. As such, while the USD may stay firm early in the week, we suspect the USD Index will struggle to break 79.50 and as a result NZD/USD will likely stay well supported on dips towards 0.6550-0.6600. Locally, the highlight will probably be Friday's retail trade figures. We're looking for a 0.1% fall in June's nominal sales, and -1.0% ex-auto, mainly as the weather-related spike in apparel-spend that drove May's surprisingly positive 0.8% unwinds. If we're right, Q2 retail volumes will probably register yet another fall, albeit "just" -0.4%, following Q1's 2.9% plunge The USD strengthened against all the major currencies on Friday night, after surprisingly strong US non-farm payrolls data sparked hopes about a US recovery. The US unemployment rate fell in July for the first time in 15 months "“ the clearest indication yet that the US economy may be turning around. Jobs fell by just 247,000 during the month, far less than the 325,000 drop forecast by economists. The unemployment rate dropped to 9.4%, down from the 9.5% seen in June and better than the 9.6% forecast. Wall Street was encouraged by the news. The S&P500 rose 1.3% on Friday and finished the week up 2.3%. Over the past few weeks, improving risk appetite has tended to see the USD weaken as investors have pared back "safe-haven" USD positions. However, this wasn't the case on Friday night. Instead, the USD staged a strong recovery as investors focused on the sharp increase in US bond yields (US 10-year bonds rose 10bps to 3.85%) and hoped for a stronger-than-anticipated US economic recovery. The USD Index rose 1.5% from 77.70 to above 79.00. EUR/USD skidded from above 1.4400 to nearly 1.4150. The real question for the coming week is whether or not this shift to buying USD on relatively better economic news continues. This week's US data includes June's trade and July's retail sales and industrial production. Quarterly results from the major US retailers should provide additional clues on the outlook for retail sector. However, the highlight will probably be the FOMC decision. While no one is expecting the Fed to change its official policy setting, of 0-0.25%, the Fed statement will be closely monitored for changes to their economic outlook. We think it's premature to be looking for any hints on how the Fed is planning to exit quantitative easing. In fact, like the Bank of England last week, the Fed could well signal that it intends to increase its quantitative easing program. As such, while the USD may remain firm early in the week, we suspect the USD Index will struggle to push above 79.50 and we look for pull-back towards 77.50. We suspect EUR/USD will struggle to push above 1.4450 this week given the relatively anaemic economic performance of the Eurozone (Thursday's Q2 GDP release is expected to show a 0.5%q/q contraction) and concerns that the worst of the banking sector crisis may still lie ahead. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.