Opinion: NZ$ well placed to trade above 66 USc this week

By Danica Hampton With a close just below the resistance window of 0.6625/0.6650 the New Zealand Dollar appears well placed this week to trade with an ongoing positive bias. Following the stronger than forecast Q1 US GDP data and reaction to some key resistance levels on the S&P and MSCI, it seems likely that we will witness further bouts of rising risk appetite in the weeks to come. The -1% q/q annualised GDP decline, which included a much larger than expected inventory drawdown, bodes well for Q3, even if by then stimulus effects may be waning, knocking personal consumption further. Well before the publication of Q3 GDP the Obama administration may be on its way to orchestrating another stimulus package. Equity markets rounded out the week with further gains, for the S&P this was a small gain as US data once again highlighted a certain softness in the consumer sector, but reinforced analysts' expectations that the recession & associated economic slump is abating. Sentiment seems cautious though, as the Q2 GDP showed the US household has become very frugal. As we would expect given fiscal expansion since the US election, the number was enhanced by a lot of Government spending. Even so the Dow Jones had its best July since 1989, while the S+P 500 recorded its' best gains for July since 1997. This week in New Zealand the June quarter labour market data releases are the main focus. Tuesday's Labour Cost Indexes and the Quarterly Employment Survey wage and salary statistics are expected to confirm continued deceleration, from last year's relatively strong pace. For the QES filled-jobs series, we're looking for something in the range of 1.725 to 1.735m to "line up" with the 1.0% decrease we expected in Thursday's HLFS "official" employment results for Q2. The latter, combined with the moderation we expect for the participation rate - to 67.9%, from 68.4% - would shunt the jobless rate up to 5.7%, from Q1's 5.0%. The market is looking for a 5.6% unemployment rate. The only other scheduled local news is Tuesday afternoon's commodity export prices. These are likely to be mixed, still, with the rising New Zealand Dollar an obvious impediment to the NZD priced series. Fonterra, fresh from affirming their current forecast for the 09/10 season at $4.55 have the outcome of their monthly milk powder auction to confirm on Wednesday morning NZ time. Despite the initial weakness seen immediately after the OCR of last week, a combination of improving and ongoing risk appetite, strength in commodity prices and a broadly weaker USD all played a part in NZD strength late last week. Traders stale short positions were squeezed out as stop loss orders were triggered above the 0.6585-90 level. Real money demand for portfolio rebalancing was also evident in month end flows for fund managers. In both AUD and NZD we continue to witness Central Bank/sovereign names diversification which is helping to support the two currencies. The NZD does not yet appear to be technically overbought so there still looks like to be some risk we have more upside to come, unless we see a major turnaround in the fortunes for equities and commodities this week which would cloud global appetite for risk and investment diversification. Now that the US Corporate earnings season is behind us, asset markets including Foreign Exchange will now turn their attention to economic data to determine whether the three week rally in equities and commodities will continue or finally correct. The USD is likely to continue shadowing moves in commodities and equities , as we note that the recent rise in risk appetite culminated in the USD index (DXY) falling to new lows for 2009 on Friday night. There are a number of Central Bank meetings this week to be cognisant of, starting with the RBA on Tuesday. RBA Governor Stevens sent Aust bill yields higher last week when he signalled a shift in bias from dovish to neutral and gave a very up-beat assessment of the local and global economies (contrast that with the RBNZ commentary). Not all analysts agree with such a view of course, especially with Chinese trade in reality such a small part of Australia's overall GDP, and so there are no expectations for the RBA to move on rates on Tuesday. Our own economists feel that the statement will not likely be newsworthy ahead of the RBA MPS released later next week. The calendar is also busy with Australian data that should provide us with a good look at the economy; Retail sales (Tuesday), Trade data (Wednesday) and Employment data (Thursday). The Bank Of England holds their MPC meeting on Thursday as does the ECB. Neither Central Bank is expected to change rates, but the market will pay close attention to the BOE statement to see if they have completed their quantitative easing policy. Weekend media in the UK argues they should continue with QE. It is a big week for US data with non - farm payrolls data the main event on Friday. Earlier in the week keep on eye on US ISM construction spending and factory orders, following the Q1 drop of 5.5%.