Opinion: Kiwi falls against Aussie after RBA tipped to keep official rate steady (Update 2)

By Danica Hampton Editor's update following an announcement (at 9:00am) by Reserve Bank Governor Alan Bollard warning that the rise in long term interest rates was "out of line with Reserve Bank expectations." The NZD/USD fell from about 0.5710 to as low as 0.5586 following the announcement at time of update 2. The NZD also fell against the Aussie and NZD/AUD at time of update 2 had fallen as low as about 0.8080. Yesterday's NBNZ business survey was just as awful as February's edition. The lack of any green shoots of recovery whatsoever will surely disappoint those hoping the worst is behind us. The survey made it clear the business sector is still struggling and suggests the NZ economy will continue contracting in Q2 2009. The data painted a picture of the NZ economy at odds with RBNZ hopes of mid-year rebound; it reinforces pressure to cut the OCR further and calls into question recent moves higher in the NZD. Despite yesterday's economic news, NZD/USD pushed higher last night as month-end and quarter-end flows took centre stage. Steady USD selling was noted throughout the night largely from custodial and real-money accounts, which was thought to be related to month-end and quarter-end flows. With global equities rebounding strongly in March some of this USD supply was likely related to the rebalancing of currency hedges. Solid gains across global equities and improving risk appetite also helped underpin risk sensitive currencies like NZD/JPY. NZD/JPY rose from around 55.50 to above 56.50 and NZD/USD pushed up above 0.5700. However, it wasn't all one-way traffic in NZD/USD. Steady selling of NZD/AUD was noted last night, which was likely triggered by a Terry McCrann (who's been fairly good at picking RBA surprises over recent months) article suggesting the RBA may keep rates steady in April. As investors come around to our RBNZ view in coming weeks, NZD/AUD will likely head back towards 0.8000 (but we don't think the arguments for a move below 0.8000 are compelling). For today, we suspect NZD/USD will struggle to push above the 0.5740-0.5750 region. On the downside, initial support is seen around 0.5650-0.5660. But we continue to think the risks are skewed in favour of a deeper pull-back towards 0.5500-0.5550 in coming sessions. The USD weakened against most of the major currencies last night, battered by month-end flows and improving risk appetite. Heavy USD selling was seen throughout the night (as well as at the London fix), which was thought to be related to month-end and quarter-end flows. With global equities rebounding strongly in March (the MSCI World Equity Index is up 6% and the S&P500 is up about 9%), some of this USD supply was likely related to the rebalancing of currency hedges. Solid overnight gains in equities markets added to the weaker USD tone. As improving risk appetite encouraged investors to trim back "˜safe-haven' bets in the USD and encouraged demand for risk sensitive currency pairs like EUR/JPY. Solid demand for JPY crosses saw USD/JPY surge from below 98.00 to above 99.00. EUR/JPY rose from around 129.00 to above 131.50 and EUR/USD climbed to nearly 1.3350 before easing off its highs. Despite gloomy comments from General Motors, global equities chalked up solid gains led higher by financials. Sentiment was helped by Barclays declining to take part in a British asset-protection scheme. Shares in General Motors fell about 10% after the new CEO warned that bankruptcy was "more probable" for the automaker. Nonetheless, the FTSE rose 4.3%, the DAX climbed 2.4% and the S&P500 is currently up 1.8%. Lacklustre US data saw risk appetite tempered late in the NY session. The S&P Case-Schiller house price index fell 19% in January from a year earlier "“ another record drop. The house price index is now sitting at levels not seen since September 2003, and is down about 40% from the peaks seen in July 2006. The Conference Board's measure of consumer sentiment rose to 26 in March, but this undershot expectations of 28. The Chicago PMI also disappointed, falling to 31.4 in March vs. 34.3 forecast. The economic news was a little brighter on the other side of the Atlantic. In the UK, the GfK/NOP consumer confidence index rose to a 10-month high of -30 in March (up from -35 in February). Although German unemployment rose by 69,000 in March and the unemployment rate ticked up to 8.1%. While markets were distracted by month-end flows, it's worth noting, World Bank President Zoellick said the USD will remain the world's dominant reserve currency and said a strong USD is key to lifting the world out of economic and financial crisis. ________________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.