Opinion: Kiwi$ waits for OCR announcement at 9am
30th Jul 09, 8:38am
By Danica Hampton We thought yesterday's NBNZ business survey could reasonably have gone either way, having steadily clawed its way back from utter collapse back in March. As it turned out, it took another definite step back toward the safety zone. This is far from the party zone, of course. But July's survey would seem to tell of a local business sector doing well in its damage control, albeit with some ways to go before being able to breathe a full sigh of relief. This is despite the headwinds attributable to agriculture, & the higher NZD. The profitability and employment indicators suggest damage-control is working and feeding our theme of an eventual, mild GDP recovery. Particularly encouraging readings were in employment intentions at -6.8, from -16.6 and profit expectations lifting to -13.8, from June's -24.2. Yes, they're still negative, and well below average. But they are substantially less negative than in the immediate past. However, nurturing is crucial, counselling a low-for-longer OCR. Also in the news locally, and despite some whispers & wariness of "bad" news as tends to be human nature, Fonterra were able to yesterday affirm that their forecast payout for 2009/10 is still $4.55 despite the rising NZD. Fonterra has essentially found some value-add performance to distribute to dairy to compensate for an underlying drop in the direct payment for milk(solids) associated with soft international prices and the higher than budgeted exchange rate. While confirming very hard times for dairy farmers, at least Fonterra has signalled the likelihood of it not becoming even more negative for dairy incomes (as seemed the immediate threat). The above news underpinned the NZD performance overnight, though this has tended to come through in cross rates and a steady TWI as across markets the USD is somewhat firmer. The catalysts for the performance of the greenback are seemingly a sharply softer day on Chinese equity markets and subsequent commentary from the IMF that we re a "long way from a situation where the Dollars' supremacy would be contested". This morning of course our focus is the OCR. A brighter assessment of both the local and global economy is likely to be noted rather than "outlook remains weak both in New Zealand and in other countries" from June's MPS. The commentary should be unchanged in its expectation of a resumption of growth, albeit it slow and fragile toward the end of this year, with weaker employment still a risk well into 2010. Of course for traders the wording of any rebukes, or otherwise, on the stronger New Zealand Dollar will be an immediate focus. Surely Bollard will reiterate his sentiments from last month's MPS and indeed echo the BoC, his Canadian counterparts, who identified their currency's strength as a "brake on growth". At the MPS Bollard said the rising NZD "creates an unhelpful tension with our projections." The update on the inflation outlook should continue to see this falling through the course of this year before returning inside the band in early 2010. Finally the outlook for the OCR and an ongoing acknowledgment that the low OCR and stimulatory fiscal policy are key to the recovery story in NZ seems necessary, otherwise any suggestion of removing this stimulus risks further out-performance of the New Zealand Dollar. On the day support appears at the recent base for the Kiwi, which has been towards 0.6500/0.6525. While ongoing resistance is pegged towards the 0.6625/0.6650 window. A slump of 5% in Chinese equity markets curbed the appetite for continued FX risk in overnight markets. The fall, it seems, was triggered by domestic news that the nation's two largest state-owned commercial banks have capped their 2009 lending facilities. This followed reports that Chinese regulators are pressuring banks to ensure new loans are put to work in the real economy rather than providing liquidity for equity and real estate markets where in their opinion bubbles are forming. To note the fall in equity markets was not contagious, most European bourses posted gains, across Asia markets were mixed and in the U.S stocks are off small amounts overall. In other news last night US durable goods data printed a disappointing headline -2.5% in June though the ex-Transportation outcome of 1.1% was brighter. The Fed's Beige Book has just hit the wires, noting the pace of economic decline has moderated and stabilised at a low level in most districts. Finally the IMF's Strauss-Kahn commented that "while we still think about a different system I do not think that the IMF's SDR would be in a position to replace the immense mass of dollars circulating in the world which are used for international payments". * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.