Opinion: US$ seen weak through holidays
17th Dec 08, 9:26am
By BNZ Markets Economists As we mentioned yesterday, despite our local economic analysis the NZ$ will take it's direction from the broader market, and in line with the strength seen in EUR, GBP and AUD over the past week the New Zealand Dollar opens this morning at the 56.5 level against the USD. Negative US dynamics have come to the fore in recent days, whether it's data from the consumer or business sectors or whether it's the ongoing saga of how to support the US automakers; all of which has soured sentiment for the USD. So despite equity markets failing to impress and softness in emerging markets, traders and fund managers have looked to reduce or reverse the USD longs that served them well through October and November when deleveraging and funding flows favoured the greenback. Through the past three months there had of course been weak US data and the rapid expansion of US fiscal and monetary policy, however, the financial system provided extraordinary support for the USD as post the Lehman's collapse funding and deleveraging flows dominated. Many US analysts suggest this process is completed and relative fundamentals can once again dictate markets. Further broad USD weakness seems likely through the Holiday period, so the potential exists for the NZD to trade with a firmer bias in what is likely to be at times volatile and illiquid markets. Our immediate outlook would suggest that while the 0.5425/0.5475 provides support then broad currency strength should prevail and allow the NZD to trade closer to early November levels just below the 0.6000 level. Our macro view of the NZD and the impact of the local economy into H1 2009 remain unchanged, that view coloured by anticipation of further global weakness as covered yesterday when we wrote of expectations for NZ's trading partner growth. This is now seen as basing at just 0.3% in 2009, lower than even that seen during the 1982-84 global recession. The slumping international outlook poses further downside risks to our forecasts, as well as those of the Reserve Bank. As such, the RBNZ might well be required to cut the OCR substantially further than the December MPS indicated. For today, expect any further rally to still meet headwinds closer to the US 57 cent level, with initial support on the day likely to show at the 0.5580/0.5610 window. The local day starts with attention on the FOMC, with 80% of analysts looking for a further 50bp of easing from the Federal Reserve which would take the Fed Funds Rate to 0.50%. The announcement is due at 8:15am NZ time. Overnight equity markets fail to impress with light gains the general order of the day. US data printed on the soft side of forecasts, firstly US CPI fell 1.7% in November taking the YOY rate down to 1.1% (previous 3.7%) and then November Housing and Building numbers were released and showed further deterioration. The Housing Starts were 625k (prev. 771k) and Building Permits were 616k (prev. 730k). Earlier in the overnight session EZ PMI data was not as bad as feared, though it still printed at 34.5, below the previous readings at 35.6. UK consumer price inflation fell to 4.1% in November, down from 4.5%. That drop was a little less than our expectation for a decline to 3.9%. By contrast, the RPI based measures were weaker than expected, with a fall in RPI inflation to 3.0%, from 4.2%, and a drop in RPIX inflation to 3.9% from 4.7%. Finally, yesterdays RBA minutes signalled that there will be no inter-meeting cut in January in Australia. * Danica Hampton is away for the week. All of the research produced by the BNZ Markets team of economists is available here.