Opinion: Japanese selling the Kiwi, fewer green shoots in the US
3rd Jul 09, 9:07am
By Danica Hampton NZD/USD may have led the pack yesterday, but the rest of the currencies have seen the light (or is that the dark?) playing "˜catch-up' by tumbling lower last night. Overnight, global sentiment deteriorated. Initially, it was negative news out of Europe that eroded risk appetite. Moody's downgraded Ireland's ratings from Aa2 to Aaa. The ECB left rates unchanged at 1.00%, but President Trichet was relatively downbeat on the outlook for growth. And the Riksbank surprised markets by cutting rates another 25bps to 0.50%. However, a disappointing US non-farm payrolls release (payrolls fell 467,000 vs. 365,000 forecast and the unemployment rate rose to 9.5%) also saw investors reassess the timing and strength of the anticipated US recovery. Global equities plunged "“ the DAX fell 3.8%, the FTSE dropped 2.5% and the S&P500 is down 2.9%. The backdrop of deteriorating global sentiment and falling risk appetite saw investors ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. The break below 0.6350 in NZD/USD triggered a wave of selling from model and technical-driven accounts and NZD/USD was dragged below 0.6300. For the NZD, there's been a lot of focus on impending Uridashi and Eurokiwi redemptions (there's NZ$4.6b maturing in July well above the usual monthly maturities of NZ$1-1.2b), the drop in NZ export prices (Fonterra's average dairy price fell 3%m/m and the ANZ commodity price index fell 5%m/m in NZD terms) and an offshore investment bank's "sell NZD/AUD" recommendation. Both real-money and retail accounts out of Japan have been active sellers of NZD. After flirting with 63.00 early in the week, NZD/JPY fell below 60.50 last night. For today, the deteriorating global backdrop, concern about the fragility of NZ's recovery and July's impending Eurokiwi and Uridashi maturities should help limit NZD/USD bounces towards 0.6350. However, solid support is expected on dips towards 0.6250. The USD strengthened against most major currencies last night as risk aversion came back into play. US non-farm payrolls disappointed, the Riksbank unexpectedly cut rates and equity markets around the world plunged. European currencies led the move lower early in the night. As widely expected, the ECB left rates unchanged at 1.00% and President Trichet said activity would remain "weak" and recovery was unlikely until mid 2010. The Riksbank surprised markets by cutting rates another 25bps to 0.50%. Swiss National Bank (SNB) board member Jordan said the SNB will continue to intervene on an ad-hoc basis to prevent the CHF from rising. Then, US non-farm payrolls took centre stage. The release showed that 467,000 American's lost jobs in June, far more than the 365,000 decline expected. The unemployment rate also rose to a 25-year high of 9.5% and generally dented recent hopes that the US recession may be abating. The disappointing US jobs hammered home last week's Fed message - that rates will remain at exceptionally low levels for an extended period of time. US interest rates fell as investors pushed out the timing of any anticipated rate hikes and equity markets plunged. US 2-year government bond yields dropped 6bps to 0.98. European markets fell 2.5-3.5%, while the S&P500 is currently down 2.9%. In currency markets, escalating concern about global growth and plunging equities saw investors ditch growth sensitive currencies in favour of the relative safety of the USD and JPY. Against a generally firmer USD, EUR/USD fell from above 1.4100 to below 1.4000 helped along by heavy selling of JPY crosses (like EUR/JPY). Effectively, today's non-farm payrolls has provided a reality check on the optimism that emerged after May's better-than-expected non-farm payrolls release. Given the market now knows the Fed's view on the outlook for interest rates and inflation, we suspect today's soft payrolls result will set the scene for a retracement period. Where stocks ease back and the USD moves from the recent sideways shuffle to a slightly stronger position for the next few weeks. This does not change our longer-term view of a weaker USD, but we could see a few weeks of the opposite direction. We've highlighted the 78.00 and 82.50 levels in the USD Index as the key levels to watch and we look for a push up towards at least 82.50 in the near-term. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.