Opinion: Kiwi$ stays up around 61 USc as US dollar weakens
22nd May 09, 10:05am
By Danica Hampton The sentiment for a weaker USD continues to dominate foreign exchange markets, shaking off pieces of weak data and market news and as we have seen in the past week dislocating from correlation with the fortunes of equity markets. Measures of risk appetite like the VIX and Crossover spreads have actually been tempered overnight, but as we open this morning you wouldn't know it by the levels of the major currencies and the NZD. There is a more mixed look to our flow reports with custodial clearers some demands for AUD and NZD, suggesting real money appetite, though again there appears to be heavy involvement from the proprietary and leveraged accounts as they milk the sentiment and look to extend the losses of the weak greenback. Yesterday's migration and tourism numbers were interesting, immigration continues to rebound. In fact, it's verging on surging. In thinking about what this means for the economy, especially housing, it's interesting to note the pick-up in immigration is not really the consequence of foreigners arriving on these fair shores, nor ex-pats returning home in droves - as one might have presumed given the global recession. Instead, it predominantly reflects resident Kiwis staying put (a phenomenon we predicted in our mid-February research note entitled "New Zealand's impending immigration boom?"). Migrant departures in April were down 22% y/y. The "truth" is probably a moderately negative annual comparison on tourist arrivals, when combining March and April. That's the good news. The bad news is that the annual drops will only get worse over the remainder of the year, at least. There's little denying the NZ tourism industry remains one of the most exposed to the deep global recession. Largely as we suspected, credit card billings within NZ during April registered a technical recovery (+2.3%) from March's over-sized drop (-2.8%). Traders today will continue to eye the 0.6110/0.6130 window keenly as the area the NZD has as yet failed to surpass this month. A further failure to progress could draw the recent bulls to take profit on their "longs", especially with a long weekend looming for the UK & US markets. As we've noted this week, ultimately the NZD's fortunes will mirror those of the major currencies. Immediate support on the day should again be evident on any pullback to the 0.6010/0.6030 level. Standard & Poor's overnight downgraded the outlook on the United Kingdom's sovereign credit rating from stable to negative. This outlook revision is based on their view that, "even factoring in further fiscal tightening, the UK's net general government debt burden may approach 100% of GDP and remain near that level in the medium term". Indeed, the UK's total cumulative debt accumulated throughout history which stood at £526bn in 2007-08 is now expected to more than double in just 5 years. Today's ratings announcement from S+P may have been a surprise in terms of precise timing, but the message it contains has been clear for some time. While in the immediate period after the announcement the GBP lost over 200 points it has regained those losses and more during a New York session of continued currency demand and a well bid UK Gilt auction. Other items of UK data have also been brushed aside, Public Sector Net Borrowing was £8.5 billion in April, more than the market was expecting and up from £1.8 billion last year and underline why S&P felt required to lower the UK outlook to negative. The volume of UK business investment fell a whopping 5.5% in the first quarter, much larger than the Q4 drop of 1.5%. Equity markets have lost in the vicinity of 2.5% on both sides of the Atlantic, responding to the data and news which also includes further weakness in the US Continuing Claims numbers, now at 6,662k (previous 6,587k), though the Philly Fed Survey at -22.6 is touted as yet another indicator that things have stopped getting any worse any faster. Once again price action suggests the markets are repricing the risks associated with owning USD and US assets, a point not lost on Treasury Secretary Geithner when he said, "we must get our fiscal house in order or risk "¦crowding out productive private investment". ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.