Opinion: NZ$ still looks too high after trending lower in recent weeks

By Danica Hampton Just when we might have thought it was all over for currency markets, lower levels were in store for the NZD and local exporters would finish the week with the beginning of a smile on their face, currencies have traded right back into the middle of very familiar ranges. Some real money demand was noted in our NZD flows yesterday, in part from local clients and in part from Asian counterparts, while the US earnings season started with a positive outcome from Alcoa that helped soothe equity market nerves. Asian sovereign and semi-official accounts were also noted buyers of currencies like the EUR and GBP that helped to underpin currency sentiment. However, it was the update from the BoE that spurred a GBP lead currency recovery in overnight trade. With no expansion of QE the market rushed to cover trading shorts, taking the NZD and the AUD along for the ride. Equity markets on both sides of the Atlantic posted positive outcomes, helping underpin currency sentiment though equity investors sentiment remains fragile with the US earnings season about to get into full swing. Generally overlooked yesterday were a couple of NZ data releases. Firstly, just when the month-to-month spending indicators looked to be improving, along came June's electronic card transactions to knock it all on the head. Total ECT values fell a seasonally adjusted 0.4%. The retail component dropped 1.0%, essentially reversing, in one fell swoop, the gains seen in April and May. The ex-auto retail sub-set of the ECT data fell 1.2%. Secondly, the Real Estate Institute of New Zealand published its June report yesterday afternoon. Overall, the results were another respectable bunch, essentially consolidating recent signs of repair. While headline sales slipped to 6,040, from 6,291, it implied a marginal gain once seasonally adjusted. And although the annual gain moderated, it was still hefty, at 40.3%. Generally speaking, sales have bounced commendably off early-2009 lows. So at the end of the week, a week that threatened (promised) some insight and direction we can take stock. We should note that some of the shine has started to come off the NZD/USD over the past fortnight. A more sombre "“ and realistic "“ assessment of global growth prospects has seen risk appetites wane, with growth currencies like the NZD on the back foot at times as a result. But as we've argued for some time, a softer NZD is also in keeping with the uncertain economic situation locally. Firm sentiment may have lifted, with signs activity is starting to stabilise. But the New Zealand economy still faces substantial risk, with recently weaker dairy prices "“ historically a crucial influence on the currency "“ only adding to the downside NZD risk. To be fair, wider NZ-US swap spreads do provide some support to the NZD. Despite this, however, and the trend lower in the NZ dollar over the past two weeks, it still looks overdone. We favour a fair value of 0.5910-0.6110, with solid topside resistance pegged closer to 0.6400. To finish the week, we would expect support ahead of 0.6250 with resistance towards 0.6350. The Bank of England MPC maintained the Bank rate at 0.5% overnight and voted to continue with its programme of asset purchases totalling £125bn. In recent days markets had speculated on the idea the MPC would increase the amount of gilt purchases to £150bn, in line with the amount authorised by the Treasury as the present pace of gilt buying is nearing the £125bn ceiling imposed by the Bank in May. GBP rallied on the news the committee decided not to expand their QE programme. In the US earlier this morning we saw a better than forecast outcome in weekly Initial Jobless Claims numbers at 565k (f'cast 603k), however Continuing Claims continued to rise and were reported at 6,883k. Yesterday's Australian employment data was close to median forecasts and will have added little colour to RBA analysis & view of the local economy. The week finishes with little on the economic calendar, but sound bites from officials in L'Aquila are worth keeping an eye out for as will the mood of equity markets as more earnings reports are filed. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.