Opinion: Kiwi dollar flirts with 64 USc as world watches G8 summit
8th Jul 09, 8:30am
By Danica Hampton Currency markets continue the week trading within familiar bands, with sentiment ebbing and changing throughout the course of each session. Early yesterday morning risk appetite was given a boost by Moody's Investor Services saying that Brazilian debt could be upgraded to Investment grade, the announcement helping the NZD trade closer to the US 64 cent level, before settling close to 0.6350 during our day. The Quarterly Survey of Business Opinion (QSBO) made no impression on market pricing. Generally speaking, the QSBO was very close to what we anticipated. Though it still fell short of indicating any renewed expansion for the immediate term. While Q2 activity was reported to have slipped (perhaps more clearly than is our GDP judgment for the quarter), there were expressed hopes the next few months will see some stability, in line with our views. In this sense, a turning point is beginning to emerge. And across a broad range of indicators, with employment, investment and profit expectations not as negative as the near record-lows outlined in the Q1 QSBO. The curve-ball in the QSBO was the massive rebound in the capacity utilisation measure, CUBO. It trampolined right the way back up to 90.7%, from 86.3% in Q1. This reflected a huge bounce-back amongst exporters, following what would appear to have been a shut-down phase in Q1. The QSBO, in not surveying farmers, will be missing the dread from the falling diary payout - arguably one of the biggest issues confronting the economy at the moment (and that's saying something, in these "interesting" times). However, the dairy despondency is counterbalanced by the fact the QSBO, in being a private-sector survey, won't be fully capturing the local and central government expenditure that's in the pipeline. Overnight the NZD has again flirted with the US 64 cent level, mirroring major currency moves before falling away during a US session that has seen risk appetite back pedal, soft equity & commodity markets impacting. With so much focus on the calendar of NZ$ maturities there's mention of a small "roll-over" of Uridashi, a 3 year issue from Municipality Finance Plc for NZD 60 million. On the day as we start the wider parameters still seem to be pertinent, the topside contained below the US 64cent level while support is material at the 0.6250/0.6275 level. Yesterday the RBA not surprisingly left rates unchanged and gave a balanced assessment of current conditions. Their view on inflation risks means they are able to leave the door open for further easing if required. However their upbeat assessment of a global recovery, the strength of the Chinese economy and the better than expected Australian economic performance meant they were not portrayed as dovish in analysts reviews. FX markets may be fixated on the issue of the USD's reserve currency status as G8 leaders gather in L'Aquila, Italy Wednesday through Friday for their latest summit, but a quick glance at the agenda makes it pretty clear there will be little time for serious debate on the creation of a new global reserve currency. Not that G8 leaders are the most qualified officials to discuss currency issues - note finance ministers and central bank officials are not in attendance, but the combination of the packed agenda and long-term nature of the reserve currency question ensures there will be very little of substance to come out of L'Aquila on reserve currencies and no mention of this in any of the communiquÃ©s that may emerge. China has requested debate on its proposals for a new global reserve currency at the meeting as part of a broader discussion of reform of the international financial system. Other nations such as Russia, Brazil and India have been quick to jump on the idea of an alternative reserve currency. Intuitively China would be less keen to press for an alternative system were the US to repair its fiscal deficits and the economy recover, removing some of the downside risks to the USD. We can't rule out leaders sanctioning the IMF into conducting a long-term feasibility study of reserve currencies and even the enhanced use of SDRs, but there would be nothing to gain by announcing this in a communiquÃ©. Bear in mind also that China is not even invited to the first day of G8 so can hardly insist on putting FX on the agenda. Even if it wanted to put it in the diary for Thursday's G14 gathering, it is something the French would not want to discuss for fear of weakening the USD and sending an already uncompetitive EUR even higher. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.