Opinion: Kiwi$ lower on CIT concerns and Bernanke testimony

By Danica Hampton The currency markets have retreated from six week highs, as equity markets and the demand for risk appetite eased on concerns regarding the CIT Group and cautionary testimony from Bernanke. This sees the NZD/USD open this morning at the 0.6525 level, some way off its exhaustive move to the 0.6600 level in the London session. Once again our flows see leveraged and proprietary traders adding to their "˜long" positions, with some ongoing real money demands however, while the latter remain comfortable holders of risk the former have had their wings clipped through the New York session of trading. Yesterday's credit card billings data proved about as mediocre as we expected. Billings within NZ rose a bare 0.2% (-2.1% y/y), while billings on NZ-issued credit cards slipped 0.2% (-3.8% y/y). These results leave us of the view June's retail sales were also around flat, overall. If we're right on this, Q2 retail volumes will probably slip a bit further, while ex-auto volumes will register a faint increase.

June's migration figures had less-robust undertones compared to earlier months, and so should tranquilise the bulls. The real driver of "net immigration" is lessening departures of Kiwi residents, & as we expected - this trend carried on in June, with such departures down a greater 36% y/y. As for short-term visitor flows, arrivals were beginning to capitulate, overall. Tourist arrivals in June were down 5% on a year ago, having held up remarkably well over earlier months. Sure, it was great to see tourist numbers from Australia up 9% on a year ago, thanks partly to the ski season and various promotional campaigns. However, long-haul from Europe and North America was struggling. And arrivals from many of the Asian economies were collapsing at rates akin to the times of the 1998 Asian Crisis - with Chinese and South Korean markets running at about half their levels of a year ago, while tourist arrivals from Japan were down by two-thirds in June 2009. No data locally today, so instead we'll focus attention on Q2 CPI numbers from Australia. With the RBA and Australian authorities upbeat on their economy's ability to recover then inflation becomes more prominent on the policy radar. On the day we would expect the NZD/USD to trade within a 0.6450/0.6475 "“ 0.6550/0.6575 range as traders and investors assess relative value after the sharp rally of the past week or so. Across currency markets we have the major currencies somewhat lower against the greenback. The GBP leading the market as the UK Budget deficit climbed in June. In the UK the Office for National Statistics said Britain's budget deficit was GBP13bio last month as unemployment rose and tax revenue was impacted. Equities in the US are close to flat as the market debates whether the US$3bio in refinancing for the lender to small and medium size businesses, CIT, may yet not stave off eventual bankruptcy. The debate offsetting some better than forecast earnings reports. So far nearly 80% of S&P companies have beat analysts expectations; an outcome that has as we've seen underpinned an appetite for risk and investment in the past week. Elsewhere the Bank of Canada left its benchmark rate at 0.25 percent, and in line with comments we've heard closer to home, noted that the strength of the CAD was "moderating the economic recovery". In his testimony on Capitol Hill to the House Financial Services Committee Bernanke has said that risks to the economy remain balanced, with upside risks emanating from the global economy, and downside from weaker consumption. The latter comment about households being a weight around the neck of the economy because of job losses and reducing home values seized on by markets as Bernanke outlined the central bank maintaining highly accommodative policy for an extended period of time. The Fed's central case is for growth in H2 to be a little bigger than H1 (although a negative annual number is still likely). Recovery is seen as 'gradual' in 2010, 'with some acceleration in activity' in 2011. This looks to be a little weaker than those looking for the US to recover first would like. Bernanke makes much of the fact that the Fed's exit strategy is market dependent. In his view, banks will stop demanding funds from the Fed as the economy recovers so the balance sheet will wind down of its own accord. We will wait and see on that one. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.