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Opinion: Why the NZ$ rebound vs A$ may be over

Opinion: Why the NZ$ rebound vs A$ may be over

By BNZ Currency Strategist Danica Hampton

The NZD/USD has spent the past 24 hours trading choppily within a 0.7000-0.7070 range. The NZD/USD has spent the past 24 hours trading choppily within a 0.7000-0.7070 range. Yesterday afternoon, NZD/USD was dragged higher by strong gains in AUD/USD; after yesterday’s Australian capital expenditure data beat expectations. Cappex climbed 5.7% in Q2, well above forecasts for 2.0%. The upward surprise in cappex was enough to offset Wednesday’s disappointing construction data, and our economists are sticking to their 0.5%q/q forecasts for Australian Q2 GDP (September 3). AUD/USD climbed from 0.8600 to above 0.8680 and NZD/USD was dragged from around 0.7020 to nearly 0.7070. But NZD/USD strength didn’t last. An overnight rebound in the USD, amid a mix of strong US GDP (it printed at 3.3% vs. 2.7% forecast), a soft UK CBI retail survey and dovish comments from Bank of England officials, knocked NZD/USD back to nearly 0.7000. For today, expect the fortunes of NZD/USD to be closely tied to USD sentiment. We suspect dips will be limited to 0.6970-0.6980. Initial resistance is seen ahead of 0.7030-0.7040, but a break above this level could see the currency squeezed up towards 0.7070. Looking ahead, it will be worth keeping an eye on events across the Tasman and NZD/AUD. Over the past month or so, worries about slowing Australian growth and near-term RBA rate cuts has seen NZD/AUD rebound from nearly 0.7700 to above 0.8200. However, we think the recovery in NZD/AUD is close to running its course. While the RBA is widely expected to cut rates 25bps to 7.00% next week, with recent Australia data suggesting the economy is not slowing as sharply as many feared market participants may be overestimating the scope of future RBA rate cuts. Should the RBA statement temper easing expectations and Australian data continue suggest the economy is holding up okay, expect to see downward pressure on NZD/AUD. Majors The USD inched higher against most of the major currencies last night, underpinned by upbeat US data, stronger US equities and softer crude oil prices. US GDP grew at an annualised pace of 3.3% in Q2, well above analyst expectations of 2.7%. Meanwhile, the core PCE deflator printed on expectations of 2.1%. Average annual US growth in the first half of 2008 is estimated around 2.3% - hardly a recession. Markets reacted positively to the US data – the S&P500 is up 1.27%, US 2-year bond yields up 11bps to 2.38% and this helped support the USD. EUR/USD slipped from above 1.4800 to below 1.4680 as the upbeat US GDP made a stark contrast to the soft data that has emanated from Eurozone recently. Recall, Eurozone GDP slipped -0.2% and German GDP fell -0.5%q/q in Q2. Some of the EUR selling was rumoured to be attributed to sovereign wealth funds and semi-official names. The economic news also looks pretty ugly in the UK and GBP/USD slipped from around 1.8400 to below 1.8250. The latest CBI survey pointed to a fairly desperate August for UK retailers. The headline index fell to -46 in August, from an already weak -36 July, its lowest level since the series began in 1983. Extremely dovish comments from Bank of England MPC member Blanchflower added to the weight on GBP. Blanchflower said the UK economy is in recession and the Bank of England needs to act now and perhaps implement larger than usual rate cuts. Looking ahead, the next two weeks are filled with central bank decisions and economic events and we can’t help but think the USD will come off looking the best of a bad bunch. After all, recent US data has tended to surprise on the upside, unlike data elsewhere in the world. Furthermore, while the latest FOMC minutes suggest the Fed is in no hurry to change interest rates, the next move will be up. In contrast, the next interest rate move from the ECB and Bank of England will likely be lower, albeit not any time soon. The ECB is widely expected to keep rates unchanged at 4.25% next week. But with the Eurozone economy already halfway to a formal recession the ECB’s optimism looks increasingly misplaced. While we expect the ECB to revise down its growth forecasts when it publishes them in September, policy makers are still extremely worried about inflation and so rate cuts are unlikely until 2009. Overall, we suspect EUR/USD will struggle in the absence of a stock market plunge or a disastrous US non-farm payrolls number (due September 5). * 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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