Opinion: Kiwi dollar holding above key 58.3 USc level

Danica HamptonBy Danica Hampton The NZD has started the week on a bright note, climbing away from the technically significant 0.5830/0.5840 level thanks to an FX market that has shown a healthy ongoing appetite for risk. Sentiment is fickle and last week's European and in particular German data should not be discounted as an influence or reality check, but to start the week a mix of the Indian election results, Japanese Consumer Confidence and UK housing statistics have spurred gains for the NZ$ on the coat-tails of a firmer AU$ and GBP in particular. The appetite for investment in risk sensitive currencies is also evidenced by the announcement of interest in NZ$ Uridashi, as Rabobank Nederland NV launches a NZ$419mio 2 year issue through Daiwa Securities which will be offered from May 21 to 29. Our flows once again showed real money demand at times, soaking up the supply from micro traders and those betting on a break lower in the NZ$'s fortunes. Yesterday's local data releases showed the service sector took a turn for the worst in April. The PSI for April was 43.7, down 3.4 points from March, ending a run of relatively improving results for the sector. Business NZ chief executive Phil O'Reilly said that it was disappointing to see the sector re-trench after some relatively encouraging results in February and March. Our BNZ Capital analysts say the troubled tourism sector is having a major influence on service sector performance. "Tourism's success, or otherwise, is split between the revenue it accrues from domestic expenditure in addition to its offshore sourced earnings. In the current environment both are under threat." The headline output PPI fell 1.5% in the March quarter, confounding market expectations of a 0.3% gain. But this mainly reflected a long-overdue "correction" in dairy prices, to bring it in line with the much lower milk solids payout compared to last year. Other negative price influences related to oil, electricity and other selected industrial commodities. Today's PPI report also told of sticky inflation in the retail sector - something we first noted in the March quarter retail report of last week. The retail PPI increased 0.9%, to be 3.4% stronger than 2008 Q1, while that for accommodation and restaurants lifted 0.7% and 5.2% respectively. It's hard to know how much of this relates to recouping exchange rate costs, or a desperate attempt to increase margins amid obviously shrinking sales volumes. Either way, it's not good news for the retail sector. No local data to focus on today, however, there's quite a rush from across the ditch as the RBA Governor & Treasury Secretary speak at different venues, while the RBA releases the minutes from it's May meeting. The Treasury Secretary, Ken Henry, is speaking on the Challenges for Fiscal Policy and following last weeks budget his address will probably make for an interesting listen. On the day we would expect traders to support shallow dips to the 0.5875 level with more meaningful support evident at the 0.5830/0.5840 level, (200 day moving average is now at 0.5834). The topside in the first instance should find resistance pegged at the 0.5975/0.6000 level. The sentiments & convictions of traders in financial markets continue to be fluid. Yesterday the bulls took a lead from the Indian election outcome that spread across Asian FX and was further assisted by a slight improvement in Japanese Consumer Confidence. UK house price data from Rightmove encouraged risk appetite and with equity markets in the black we find ourselves opening the day with the NZ$ back to 0.5925, in step with the AU$ at 0.7625 and the GBP at 1.5320. There's Industrial Production & Capacity Utilisation data today from Japan that could quite easily pour some cold water on the mood of the market., and as a follow-up to last weeks horrific German GDP there's ZEW and Construction data from Germany & the Eurozone tonight. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.

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