Opinion: Kiwi recovers as China expands its fiscal stimulus
5th Mar 09, 9:14am
By Danica Hampton After falling to a fresh six-year low of 0.4900 yesterday afternoon, the NZD/USD staged a remarkable recovery and climbed above 0.5050 last night. Market sentiment improved dramatically last night following news that China was upping its fiscal spending plans. Chinese equities surged more than 6% yesterday and this set the tone for equities elsewhere in the world. The strong rebound in global equities encouraged investors to trim "safe-haven" currency positions and the USD weakened against most major currencies. Against a generally weaker USD, the NZD/USD pushed higher. While some real-money selling of NZD has been seen over the past 24 hours, this has been more than offset by heavy demand from short-term speculative players and position squaring from momentum-driven funds. It's hard to know if last night's rebound in investor confidence is substantive, or just a house of cards. However, it's worth noting, the "fair value" range for NZD/USD as implied by our short-term valuation model (which is based on NZ-US 3-year swap spreads, NZ commodity prices and risk appetite) is currently 0.5000-0.5200. With NZD/USD currently sitting within its "fair value" range, this suggests there isn't a compelling fundamental reason to chase the currency lower unless you expect NZ-US interest rate spreads to narrow, NZ commodity prices or risk appetite to fall further near-term. Expect currency markets to pay close attention to how equities react to the details of China's fiscal package at Premier Wen's address later today. Should we see a continued recovery in global equities, NZD/USD has the potential to squeeze back up towards 0.5200 in coming sessions. However, should this investor confidence prove fleeting and global equities resume their downward spiral, expect to see NZD/USD back below 0.5000 again. For today, we suspect bounces will be limited to 0.4990-0.5000. A break above 0.5080 will open up the topside towards 0. 5130. The USD weakened against all the major currencies last night, as a rebound in global equities saw "˜safe-haven' demand ease and investor confidence recover a little. Equities markets around the world surged higher last night amid news China would increase its fiscal spending beyond the US$585b currently proposed. There is already tentative evidence that China's down-turn may have stalled; bank lending has picked up sharply since the end of Q3 and yesterday's data showed a rebound in the manufacturing PMI (up 49.0 in February from 45.3 in January). Hopes government-financed construction projects would support the Chinese recovery, drove commodity prices and shares in related producers higher. Chinese equities surged 6.1% and this set the tone for equities elsewhere in the world. The DAX rose 5.4%, the FTSE rose 3.8% and the S&P500 is currently up 2.3%. The strong rebound in equities markets encouraged investors to trim "˜safe-haven' currency positions in the USD. Quasi-sovereign accounts out of Asia were reportedly heavy sellers of USD, while custodial accounts were rumoured buyers of EUR. EUR/USD surged from nearly 1.2450 to above 1.2600 and USD/JPY climbed from 98.20 to nearly 99.50. Against a generally weaker USD, GBP/USD climbed from around 1.4000 to above 1.4150. GBP sentiment was probably helped by data showing a pick-up in services sector activity (the PMI climbed to 43.2 from 42.5 in January) and a rebound in consumer confidence (the Nationwide index rose to 43 from 40 in January). Market participants shrugged off the US economic data. The ISM non-manufacturing index slipped to 41.6 in February, while still well below the 50 threshold the signals expansion it was marginally better than the 41.0 forecast. Meantime, the ADP employment index fell 697,000 in February (vs. 630,000 forecast) suggesting some downside risks to the 650,000 drop forecast for Friday's non-farm payrolls. Looking ahead, market participants will be looking for more details on China's fiscal spending plans, when Premier Wen addresses the National People's Congress later today. Beyond that, both the ECB and Bank of England have monetary policy decisions tonight. The ECB is widely expected to cut 50bps to 1.50% on Thursday. Debate still reigns on whether or not the Bank of England will cut rates again this week, regardless the BoE is expected to signal that it's pursuing alternative measures like quantitative easing. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.