Opinion: NZ$ to fall if Wall St. sees deeper correction
6th Jul 09, 8:44am
By Danica Hampton Currency markets closed out the week on a quieter note with the 4th of July US holiday limiting trading activity. This after what had proven to be a challenging week overall in currency markets, with the USD the beneficiary as the poor US jobs data and a gloomy outlook for the ECB weighed on investor risk appetite by the end of the week. The NZD closed down 2.4% for the week, particularly hard hit after a number of analysts' recommendations to sell NZD on crosses, especially versus the CAD & the AUD. The JPY surprisingly did not benefit from the risk in risk aversion with a number of Tokyo investment launches that led to "Toshin" demand for foreign currencies. Wall St's negative reaction to the worse than expected US jobs data last week might signal the start of a deeper correction, and a turn in investor risk appetite. If that proves true, it would be a negative for currencies like the NZD and AUD which have been beneficiaries of the "green shoots " rally that started in mid -March. There is solid resistance in the NZD now towards the 0.6450 -0.6550 region and we would see selling rallies back towards that area as the favoured strategy at the moment. Immediate support rests at the 0.6250/0.6275 level, which has held since early June. A breach of this level on a broadening of USD strength would open the way for a deeper retracement towards the US 60 cent area. According to the National Bank survey, firm sentiment has tracked higher in recent months, to be roughly neutral. So an improvement in QSBO headline confidence, from the -65 seen in Q1, looks probable in Tuesday's update. Signs of stabilisation in activity will likely be echoed, too. But of many of the underlying indicators, we're more inclined to believe things will look very weak, still. Firms are miles away from even breaking even - such is the story of the NBBO - and we suspect QSBO profit expectations will look dismal, albeit probably lifting from the near all-time lows of late. This would be hugely worrying from an indicator which, in the past, has been very quick to turn north, even while in the midst of recession. We're also not convinced we'll see clear signs that investment and employment intentions are stabilising, believing things will probably continue to look very shaky on this front. Consumers meanwhile, appear relatively chipper, with confidence supported by an improving housing outlook, falling core inflation and a further boost to disposable income from April's tax cuts. All of these factors could combine to see nominal electronic card spending push higher, again, in June. Markets appear to have the northern summer blues, with very little key data out this week. So currency markets will focus on a few events which could influence sentiment. Key events for the markets will be the RBA Board meeting on Tuesday, the BOE meeting on Thursday, and the G8 meeting in Italy that begins on Wednesday and runs through to Friday. Most recent media sound bites have "anonymous sources" quoted saying "that there is little interest among G8 participants to take up China's call for a debate on the status of the USD as the sole reserve currency'. This will be interesting to watch later in the week and if the past weeks are anything to go by "“ expect diverse views to be quoted in the media. On the data front the US trade and Michigan consumer sentiment survey, UK inflation and IP data are the main series to watch for. Equity markets performance will of course play a part in currency performance with any further weakness likely to support the USD and JPY at the expense of EUR, AUD and NZD. The RBA is widely expected to leave rates on hold, so the only change may be the date on the statement. The last Statement said that evidence continues to emerge that the global economy is stabilising and conditions in global markets are better. The Board refocussed on inflation last month and their suggestion that the medium term trend is likely to be down suggests that there is scope for further easing down the track, "if needed". There appears to be no urgency to cut at present. The RBA expected to emphasise that they stand ready to ease again on any sign of deterioration in the local or global outlook.