Opinion: NZ$ investors getting nervous about NZ recovery

By Danica Hampton The NZD/USD traded in a relatively tight 0.6400-0.6480 range on Friday night. Steady demand from custodial-type accounts and generalised USD weakness provided support. However, softer commodity prices encouraged some selling from short-term speculative players and this helped limit gains. The CRB index, a broad measure of commodity prices, slipped 0.8% on Friday night. Sentiment towards the NZD still remains fairly negative. The sense that NZ has weathered the global ructions in relatively good shape has provided a bit of support for the NZD over the past few months. While there is some evidence of "green shoots", investors are getting increasingly worried about the fragility of NZ's recovery. Friday's weaker than expected Q1 GDP (it fell 1.0%q/q vs. 0.7% forecast) was the fifth consecutive quarterly drop and Q2 also looks on track to fall. This week's NBNZ Business Outlook (Tuesday) will confirm whether the previous undertones of a mild recovery remain or whether the NZ business sector is becoming doubtful. The global backdrop hasn't provided much direction for the NZD/USD lately. Global growth expectations appear to be stabilising and the USD seems caught in a sideways shuffle. There is a lot of global data to keep an eye on this week "“ US non-farm payrolls, Japan's Tankan and the ECB policy decision. But we'll need to see the USD Index break out of its 78.00-82.50 range, before we're confident we're seeing the start of a new trend in the USD. The NZD/USD spent most of last week muddling around in a 0.6250-0.6500 range. In the absence of a major surprise from the global backdrop or the USD, this choppy range trading looks likely to continue again this week. However, concern about the fragility of NZ's recovery and impending Eurokiwi and Uridashi maturities should help limit NZD/USD bounces towards 0.6500-0.6550. Keep an eye out for today's release of May's trade balance and building consents (due 10:45am). The USD weakened a touch against most the major currencies, but it was a fairly lacklustre Friday night session. Various punches were thrown in the reserve currency debate. China's central bank renewed its call for the creation of a new sovereign reserve currency to reduce the dollar's global domination. However, Dallas Fed President brushed off China's comments and said "I don't see the dollar being supplanted as the leading currency in the world." Fisher also said that while the US economy is poised to start growing late 2009, the recovery will not be strong at first and it will be a "very slow slog". The University of Michigan consumer confidence was finalised at 70.8 in June, up from previous estimates of 69.0. While personal income rose 1.4% in May, personal spending rose just 0.3%. Despite fairly encouraging US data, global equities fell modestly. European markets fell 0.3-0.5%, while the S&P500 finished down 0.15%. All in all, it was another week of ping-pong in currency markets. EUR/USD traded choppily within 1.3850-1.4150 range, while the USD Index traded within 79.50-81.00. There is a truckload of economic data scheduled this week and a large surprise may be enough to see currencies break out of recent ranges. The key release will be Thursday's US non-farm payrolls (US markets are closed on Friday for Independence Day), but Japan's Tankan business sentiment survey is due Wednesday. In Europe, the ECB meeting is likely to be a non-event (we're not expecting any changed to the refinancing rate or any significant comments from Trichet). Speculation of large German bank losses to be unveiled in September will help ensure the EUR underperforms GBP overall. But we'll be looking to the USD Index for clues on the next direction in EUR /USD. While we expect the USD to trend lower eventually, we're not convinced the USD is ready to take a step lower just yet. The recent Fed statement, which hosed down expectations of near-term rate hikes by saying that rates will remain at "exceptionally low" levels for "an extended period", has the potential to weigh on the USD. However, the recent wobbles seen across global equities and the problems still present in Europe make us wary. Looking at the USD Index, a break below the early June lows of 78.00 is needed to suggest the downtrend has become entrenched. On the topside, a break above 82.50 is needed to suggest the uptrend is gaining traction. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.