Opinion: Kiwi steadies, but look out next week
23rd Jan 09, 8:20am
By BNZ Currency Strategist Danica Hampton NZD/USD has steadied somewhat over the past 24 hours, benefiting from some paring of "short" risk appetite from traders and leveraged players as well as appetite from commercial accounts from both sides of the Tasman. This surety in part also stems from yesterday morning's various European centred comments on intervention and rapid moves in major currencies, e.g. the Hildebrand's comments that we mentioned yesterday. Traders have been happy to square some of their currency risk after a sharp run lower for all currencies this week and the prospect of holiday interrupted markets next week, especially in Asia with the Chinese New Year impacting on their appetite. Next week of course is a fairly full calendar for local analysts, economic indicators released since the early-December MPS have heightened the odds of another aggressive OCR cut at Thursday's review. In particular, Q4's QSBO - the weakest on record, by many measures - was entirely at odds with the Reserve Bank's notion that the local recession was at an end. The survey's pricing indicators also pointed to a softer inflationary outlook than the Bank had accounted for, compounded by a weaker-than-expected Q4 CPI reading. Moreover, the global situation has deteriorated yet further over the past 8 weeks. To us, that all points to another 100bp cut on Thursday (a view we share with the market). But we're also mindful of a building risk that the Governor may disappoint the market in his choice of words with respect to the easing track later in the year. Elsewhere in the week, December's service sector index, credit card billings (both Monday) and household credit (Thursday) will look just as weak as in recent readings. December's merchandise trade figures will likely see slowdowns on both the export and import fronts, leaving the balance roughly unchanged. As we complete another torrid week in markets we would expect support at the 0.5175/0.5225 to hold with the market capped on advances towards 0.5325/0.5375. Yesterday, Manufacturing in December improved from its lowest ever level (in the previous month, November 2008) but continued its lacklustre performance, reaching only 42.5, according to the Bank of New Zealand - Business NZ Performance of Manufacturing Index (PMI). Business NZ Chief Executive Phil O'Reilly said the improved competitiveness of the New Zealand dollar and the likelihood of further interest rate cuts in coming months brought some hope, but the overall picture was very constrained. Our own economists felt that although there are some substantial cushions coming into play for New Zealand manufacturers, the dominant issue is fast becoming sagging international demand. "Inventory is accumulating the world over, which is why new orders have plunged just as much as industrial production has over the last couple of months." The ECT data was essentially flat in December. On the one hand, it's tempting to think consumer spending might be holding up better then we realise (especially considering the way petrol price falls should be depressing transaction values, all else equal). On the other hand, the still-flat trend could be taken as very disappointing, given the amount of disposable income that has come the way of households over recent months, including the 1 October tax cuts, plunging petrol prices and even falling interest rates. Short periods of volatility overnight in major currencies, but for the most part little new in direction. Weak CBI data from the UK had limited impact as the market awaits tonight's release of GDP data. This will confirm that they are officially in a recession, and We expect to see a fall in GDP in Q4 tomorrow of 1.2%, reflecting the weak industrial production data we have seen and poor surveys on the service sector and retailing. A busy New York morning of US data has contained few surprises, unless of course you'd been looking for improvement in the releases. Jobless claims soared to 589k (previous 527k) while Housing Starts at 550k and Building Permits at 549k were well below both forecasts and the previous months readings at 651k and 615k respectively. Not surprisingly then it's a tough day at the NYSE with equity indexes lower as we write, 3% or so. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.