Opinion: NZ dollar hits 65 USc as US dollar weakness dominates
2nd Jun 09, 7:31am
By Danica Hampton While most of us hunkered down over the long weekend, trying to avoid the winter weather the NZ dollar spent the long weekend basking in the warmth of investor sentiment, rallying strongly to over 65 US cents. The sentiment for a weaker USD continues to dominate foreign exchange markets while hopes of a global economic recovery are heightening, which is allowing commodity currencies like the AUD, NZD and CAD to outperform. The USD index (DXY) has continued to fall sharply and for the month of May lost some 6.8% as concern over foreigners' willingness to fund the huge US budget deficit heightened. This combined with more evidence that the global recession is abating has knocked the "safe haven" demand for the USD significantly. Model and technical driven funds were again noted in our flows; however their persistent appetite is matched by Asian retail and wholesale accounts at times. From a fundamental perspective, our analysis shows the NZD/USD over-stretched, the rally in the currency has outpaced the increase in risk appetite, NZ commodity prices and the NZ-US 3-year swap spreads. Nor should we forget that the rapid strengthening of the currency and effective tightening of financial conditions is a potential threat to NZ's economic recovery. While the export sector could probably cope with the currency bouncing in a 0.5000/0.6000 range, it's a different story if the recent trend continues higher. We are already starting to see some evidence the export sector is feeling the pinch; Fonterra's payout forecast for the 2009/10 year was $4.55, significantly below the current season's NZ$5.20. Nonetheless, as we are seeing, financial markets are not always rational and currencies can deviate from economic fundamentals for substantial periods of time. Should investors remain concerned about how the US will finance its government spending then generalised USD weakness could continue. We need to watch how US Treasury bond auctions proceed, if they are well received by investors. Bid to cover ratio's have actually been quite high and there is evidence of a reasonable portion of indirect (offshore) bids, so perhaps not all offshore demand for USD denominated assets has soured. We also need to consider that the sharp rise in long-dated US bond yields is a potential threat to the anticipated global recovery. The sharp rise in wholesale interest rates would for the business sectors impose a higher cost for capital and threaten business investment and in turn equity prices. Any faltering in the global outlook and/or equity markets likely to underpin the USD at the expense of growth sensitive commodity currencies, like the NZD. Late last week the 11.2% jump in April's residential consents was flattered by an up shift in apartments. With the ex-apartment increase of 4.5%, seasonally adjusted), the better read on things. Sure, the trend is still poor and signals strong contraction home-building activity in Q1/Q2. And, yes, the annual comparison worsened to -57%, from March's -30% y/y. But these mainly reflect Easter timing shifts. Underneath it all there's a good chance things are, in fact, stabilising (albeit at dreadful levels). It is a fairly quiet week ahead in New Zealand, data-wise. Wednesday sees the release of April's Crown Financial Statements which, in the wake of the Budget, will be worth keeping a close eye on as a barometer of how the Government's finances are tracking against Treasury's newly-updated forecasts. For ANZ's commodity prices, lifts in traded-currency prices for lamb, beef and dairy exports will likely be more than offset by the surge in the Kiwi during May, with a lower NZD index the result. And we believe softer wholesaling activity will be reflected in Friday's Wholesale Trade survey, in line with the general drop in trade volumes, particularly imports, seen in Q1. This partial indicator of GDP can be both difficult to predict and a little tricky to interpret, even with the benefit of hindsight, but we'll be looking for a sales result consistent with a decline in Q1 wholesaling GDP of -2.0%. Traders today will firstly focus on the 0.6550/0.6570 window as it is the 50% retracement of fall from last year's highs to the March '09 lows. After such a sharp move over the long weekend some pause is expected and a retreat to 0.6470/0.6490 would not surprise. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.