NZ dollar weak as Bill English's warning about possible double dip recession hits sentiment; Chinese rate hike a headwind too

By Mike Jones*

 

In an abrupt change of fortunes, the NZD has been the weakest performing currency over the past 24 hours.

 

The currency was blindsided yesterday afternoon by some downbeat comments from NZ Finance Minister English. While hardly “news”, English’s comment that a H2 2010 recession was still possible certainly curbed some of the recent speculative interest in the NZD. In the wake of the comments, the NZD/AUD dived from 0.7640 to almost 0.7600, while NZD/USD slipped 1/3 cent to 0.7720.

 

Overnight, currency markets struggled for direction somewhat. The NZD/USD spent most of the night tracking a relatively tight 0.7710-0.7740 range. A bout of profit taking saw global equity markets post modest losses, and sentiment generally lost a bit of steam after Ireland announced it will postpone capital injections into its banks. The mild cooling in investors’ risk appetite tended to dampen demand for “growth-sensitive” currencies like the NZD and AUD.

 

Worries about a rapid pace of future Chinese policy tightening (following yesterday’s surprise rate hike) provided an additional headwind for the AUD overnight. From 1.0140, the AUD/USD dribbled off to below 1.0120.

 

For today, the local data calendar is empty so direction for the NZD/USD will come from offshore. In particular, keep an eye on January Australian employment figures due at 1:30pm (NZT) and Chinese exports data out around 3pm. Both pieces of data will provide important updates on whether buoyant Asian growth is being sustained. Signs of an obvious cooling in this regard would serve to weigh on the NZD/USD. 

 

All up, we continue to look for short-term NZD/USD rallies to fade ahead of 0.7800/50. Initial support is eyed on dips towards 0.7680.

The USD fell abruptly in the early hours of this morning, before making a partial recovery, with the European currencies being the key beneficiaries.

 

The USD came under pressure following Federal Reserve Chairman Bernanke’s comments to the House. He stated that unemployment remains uncomfortably high at 9%, suggesting no plans to curtail quantitative easing. He defended the potential inflationary impact of this policy saying that “inflation is expected to persist below the levels that the Federal Reserve policymakers have judged to be consistent” with their mandate.

 

He gave warnings about the outlook for burgeoning US government debt saying “Creditors would never be willing to lend to a government with debt, relative to national income that is rising without limit”. The USD index fell from above 78.00 to below 77.60 overnight.

 

Other markets also struggled, with the S&P500 off around 0.3%, while US bond yields fell from their recent highs. 10 year yields fell from around 3.76% to around to 3.70%, with 2 year yields declining from 0.85% to 0.81%.

 

The biggest declines within the S&P500 came from the commodity related sectors (materials and oil and gas) that fell more than 1%. These declines were likely impacted by the continuing fall in the oil price that is now down 6% on the year, and the People’s Bank of China’s rates hike earlier in the week that had the potential to crimp Chinese demand for global commodities.

 

The EUR and GBP both showed strength overnight, as the most obvious beneficiaries of USD weakness. The EUR climbed from 1.3620 to around1.3720. The GBP showed some volatility overnight but climbed to around 1.6100 this morning. In the backdrop of USD weakness the GBP was able to shake off the release of disappointing December UK trade balance figures. The figures showed the UK deficit on goods has widened to the worst on record, while the deficit on good and services was the worst since August 2005.

 

Closer to home, the AUD was under some pressure overnight falling from around 1.0140 to 1.0100. Look out for the release of Australian employment figures today as a gauge to developments compared to relatively weak labour markets globally. Consensus expects the unemployment rate to hold at 5%. Elsewhere, the Bank of England meets today to decide on rates that are widely expected to remain at 0.5%. In the US today we get initial jobless claims for a high frequency snapshot of labour market developments in the US.