Opinion: Strengthening risk appetites boost Kiwi$...for now
22nd Sep 08, 8:47am
By BNZ Currency Strategist Danica Hampton The NZD/USD rebounded strongly towards the end of last week, following news that the US Treasury was putting together a comprehensive bail-out package in order to stabilise the troubled US financial sector. News of the US bail-out plan triggered a strong recovery in global equity markets (FTSE rose 8.8%, DAX rose 5.6% and the S&P500 rose 4.0%), which underpinned risk appetite and demand for currencies like NZD/JPY. Our risk appetite index (which has a scale of 0-100% and a long-term average of 50%) rebounded from last week's low of 25% to 33% and NZD/JPY climbed from below 71.00 to above 74.00. Meantime, as more detail about the US Treasury bail-out plan emerged making it clear the plan would be financed out of US government debt and this triggered heavy selling of USD. Against a generally weaker USD, strong demand for NZD/JPY, saw NZD/USD climb from around 0.6750 to above 0.6900. The turmoil in financial markets completely dominated currency markets last week and this week's focus will be on whether or not US Congress passes the US Treasury's proposed bail-out package and what this means for global equity markets, risk appetite and the USD. Last week's recovery in risk appetite and the generally weaker USD will provide some support for the NZD/USD early this week. However, with NZ teetering on the brink of recession (this week's GDP should confirm that growth also contracted in Q2), the RBNZ expected to cut rates aggressively over the coming months (our economists are looking for a trough of 6.00% next year) and global investor confidence still fragile, we expect sellers to emerge on bounces above 0.7000. On the downside, solid support is seen below 0.6600 and it will take a break below 0.6440 (the low of September 11) to suggest the downtrend is gaining traction. Friday night was all about the US Government's assault on the financial crisis, which includes a ban on short-selling of financial stocks and a comprehensive bail-out plan for US banks. Key points of the US Treasury's bail-out package:
- The US Treasury will have authority to issue up to US$700b of debt to finance the purchase of troubled assets. While these assets are intended to be residential and commercial mortgage related assets, other assets may also be bought if deemed necessary to stabilise markets.
- To qualify, the assets must have been originated or issued on or before 17 September 2008 and participating financial institutions must have significant operations in the US.
- The assets will be managed by private asset managers at the direction of Treasury. The assets may be sold or held to maturity at the Treasury's discretion. Cash received will be returned to Treasury's general fund for the benefit of US taxpayers.