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Opinion: Kiwi dollar on hold with producer prices the focus

Opinion: Kiwi dollar on hold with producer prices the focus

BNZ Currency Strategist Danica HamptonBy BNZ Currency Strategist Danica Hampton The NZ$ is little changed this morning, after a night where major currencies are marginally firmer against the US$ but trading at familiar levels as intra day volatility subsides. Recent sessions have seen a subtle shift in market psychology, weak equity market sessions are not necessarily weighing on currency sentiment against the USD. It seems that concerns about the effectiveness and the implementation of the TARP plan are impinging on USD sentiment, as the market digests media reports of lawmakers considering assistance for the auto industry. While this is viewed as a US centric issue to manage then we could witness some further dislocation of the past months bias to buy the USD as asset markets tumble. Once again in our flows we can see semi-official and sovereign agents as some ongoing demand for major currencies, providing much needed support, which the NZD is coat tailing to some extent. A rebound in fortunes for the AUD, with real money demand noted has pitched the NZDAUD lower once again. It opens this morning below the 0.8450 level after yesterday flirting with 0.8550 after the release of the November RBA minutes. The minutes strongly infer that the aggressive 75 bps easing was designed to quickly move the stance of monetary policy to neutral. The Board opted for 75 bps cut given the heightened financial market turbulence, the elevated BBSW-OIS spreads (the need to get borrowing rates down) together with the deterioration in the global macro outlook and what these factors would do to slow growth (and subsequently inflation) in the Australian economy through financial markets, commodity prices and other channels. Apologies but yesterdays commentary expected the NZ PPI releases, these are actually due today at 10.45am. Confusion with the Stats Dept scheduling doesn't change our economists' expectations though. They suspect that Q3's producer prices won't yet show the impact of weakening commodity markets, and look for +2.0% and +0.8% prints respectively for Inputs & Outputs data. Our economists are finalising their expectations for GDP in 2009 and their attention is on the risks of a weaker export and investment profile before strength returns in 2010. Further detail will follow later this week. Also announced yesterday was a previously unscheduled update on their current season payout by Fonterra, this is expected to be announced this Friday at noon. For today we anticipate support on the day to hold the NZD/USD above the 0.5450/0.5475 level, with resistance expected at 0.5575/0.5600. We open this morning to further testimony from Bernanke and Paulson in front of the House Financial Services Committee, with questioning centred on the implementation of the US$700 bln rescue for lending and insurance institutions. We'll monitor their testimony this morning over the first coffee of the day. Overnight as mentioned currencies held some sway over the USD albeit at familiar levels as market volatility reduces. In the UK a weak CPI (4.5% YOY) showed core inflation easing (previous 5.2% YOY), data which justifies the MPC's recent easing of monetary policy and shows that as per their minutes the focus has actually shifted to deflation. What matters now for the BoE is activity data and to what extent monetary easing can be assisted by fiscal easing. These are the issues that will dictate the pace and extent of easing in coming months. In this regard Thursday's October retail sales and next Monday's Pre Budget Report will be the main events to focus on. Meantime, the MPC finds itself in a situation where it cannot disappoint market expectations on rates. With markets already looking for 2%, there is no fresh or unanticipated news on which to sell GBP, an outlook that sits well with a period of pause in overall USD strength as we are seeing unfold this week thus far. US PPI data printed at all time lows overnight, the -2.8% outcome the biggest monthly decline since the inception of the series in 1947. In Australia today, aside from the WBC Leading Index for Sept. and new motor vehicle sales data we note RBA Assistant Governor Edey speaking this afternoon and Governor Stevens this evening. Both speeches focus on recent economic and market developments. * 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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