Opinion: Kiwi dollar a captive to volatile stock, credit markets

By BNZ Currency Strategist Danica Hampton Driving to work today with the harbour like a millpond and dawn breaking over the Rimutaka's you could be forgiven for thinking all is well with the world. Unfortunately the 10 minute drive is just a fleeting moment before another day of toil on financial markets. While the NZ$ has held steady overnight, asset markets continue to trade with a weak bias as another week unfolds. Sovereign demand for currencies, including the AUD helped pitch currency markets higher during the London morning. The NZ$ took heart from this and tagged along though volume and interest in trading the Kiwi remains sporadic at best. Equity markets struggled in Asia yesterday, and tended to print in the red by 2-3% in Europe overnight, curbing traders risk appetite especially in an environment of a rising VIX and widening credit default spreads. Yesterday's local data saw Food Prices fall for the first time in over a year, adding to the disinflationary mix and our economics team expect more price easing to come as the global passthrough gathers pace. Retail food prices fell 0.3% and are one element of a broader slowdown. The PSI showed the service sector struggling in tough economic conditions and well off the pace of results during the same period last year, our economists suggest there is more pain to come as they expect a sharp contraction in investment activity and an increase in the unemployment rate. Today we have Q3 Producer Prices which we suspect won't show the impact of weakening commodity markets. We forecast Inputs at +2.0% and Outputs at +0.8% (previous +5.3% and +3.5% respectively). As we start the day firmer major currencies will lend support for the NZD at the 0.5525/0.5550 level with initial resistance pegged at 0.5650/0.5675, with 0.5725/0.5750 expected to contain any extreme strength. Once again we start our day with an eye on US financial markets, where equity markets trade close to flat after a night of red ink through most of Europe and Asia. Yesterdays Japanese GDP data confirmed a technical recession and Japanese Economics Minister spoke of conditions becoming more severe after the -0.1% outcome for Q3. Overnight there's some attention on various IMF and ECB officials, Strauss-Kahn, Bini-Smaghi and the "uber hawk" Weber all mention the scope for easier ECB monetary policy, which Weber (ECB) said needed to keep in step with further cooling in the economy. Despite this, and the UK media and Opposition attention on the outlook for the GBP currencies have tended to trade firmer through the night. Sovereign and central authority demands on the day outweighing any traders or leveraged funds need to sell currencies. Data from the US overnight is a little mixed, the Empire Mfg series printing at -25.4 (previous -24.6) though Capacity Utilisation printed at 76.4 (previous 75.5). Industrial Production was up at +1.3% (previous -3.7%) though this was seen to reflect seasonal moves at refineries after tropical storms had impacted. Looking ahead, the outlook for global growth remains the key driver of currencies. Positive economic and credit news is still lacking, and as mentioned the initial response to the weekends G20 is disappointment that any fresh plans or stimulus are yet to make it to the drawing board. As such, we suspect global de-leveraging flows will continue to support the USD and JPY over coming months and help limit the topside in NZD/USD. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.