Opinion: NZ$ strengthens as markets stabilise, LIBOR falls
21st Oct 08, 9:14am
By BNZ Currency Strategist Danica Hampton NZD NZD/USD has climbed over the past 24 hours, from below 0.6080 yesterday morning to above 0.6250. Last night's global backdrop of stabilising global equity markets, recovering risk appetite and easing in inter bank lending pressures has underpinned growth sensitive currencies like NZD. The S&P500 is currently up 3.1% and the 3-month US TED spread (yield difference between Libor and T-bills) slipped 67bps to 2.95%. While NZD/USD has been propped up by the improving global backdrop, we've also seen increasing interest to sell NZD/AUD ahead of the Thursday's RBNZ decision. We think much of the NZD/AUD gains over recent weeks have been a result of market positioning and have not fairly reflected the fundamental differences between the NZ and Australian economies. With NZ growth expected to slow more sharply than that in Australia, we look for the NZD/AUD to head back towards 0.8450-0.8500 in coming weeks as fundamentals come back into play. Locally, Q3 CPI (due 10:45am) will likely grow 5.3%y/y, but dissipating domestic and global inflation pressures are likely to see future CPI readings move steadily lower. More importantly, we don't expect this week's CPI release to stop the RBNZ cutting rates aggressively on Thursday. Market pricing is consistent with the RBNZ cutting 100bps this week, but we'd caution against getting overly hung up about exactly how much the RBNZ moves this week. The more important message is that the OCR will move substantially lower over the next year (we have a trough of 5.25% penciled in for 2009). For today, the backdrop of firmer global equities and recovering risk appetite should help underpin NZD/USD. We suspect dips will limited to the 0.6080-0.6100 region. Some headwinds are expected around 0.6250, but a break above this level will see the currency extend its gains towards 0.6280-0.6300. Majors There are tentative signs that the worldwide measures taken by various governments to shore up the banking sector are starting to work. US stock markets surged higher after Fed Chairman Bernanke told Congress another wave of government spending may be needed with the "economy likely to be weak for several quarters with some risk of a protracted slowdown". The S&P500 is currently up 3.1%. Inter bank funding pressures are showing signs of easing. US 3-month Libor fell 36bps to 4.058% last night "“ well down from Friday's 4.418% and the October 8 high of 4.818%. Similarly, the 3-month TED spread (yield difference between Libor and T-bills) slipped to 2.95% well down from October's 4.63% high. Elsewhere in the world, another round of government support packages has been announced. The Dutch government announced it would inject EUR10b into ING via subordinated debt. South Korea has guaranteed US$100b in foreign currency debt and will make US$30b in foreign currency reserves available to the banking sector. However, yesterday's softer than expected Chinese GDP served as a reminder that while the financial sector may be stabilising, this is unlikely to prevent a global recession. Chinese GDP growth fell to 9.0% in Q3 (well down from 10.1% in Q2 and below economist forecasts of 9.7%). Last night, the Japanese authorities cut their forecasts for Japanese growth and warned the financial crisis could send the world into recession. Despite last night's rebound in global stocks and investor confidence, EUR and GBP remained heavy last night. It's hard to pinpoint the reasons, but worries about the European banking sector and a "sell EUR/USD" recommendation from a US investment bank may have helped. EUR/USD slipped steadily from above 1.3500 to below 1.3300 and GBP/USD slipped from above 1.7500 to nearly 1.7100. Against a backdrop of slowing global growth, we'd expect investors to shift into more traditional markets and more traditional asset classes and these repatriation flows are expected to benefit both the USD and JPY over the coming months. With economic growth now a greater focus, keep an eye out for Friday's Eurozone PMIs and the preliminary estimate of UK Q3 GDP. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.