Greenback sentiment in the doldrums

Kiwi to trade in 'fair value' US72c to US74c range

27th Sep 10, 9:34am by bnzeconomists

By Mike Jones

The NZD/USD climbed to an 8-month high above 0.7400 last week. But it was hardly an inspiring performance. More evidence of a lacklustre NZ economic recovery ensured the NZD fell against all of the other majors. Indeed, on a trade-weighted basis, the currency ended the week down 0.5%.

Last week’s data provided further confirmation, if any more was needed, that the NZ recovery is a slow and bumpy one. Not only did the annual current account deficit increase from 2.4% of GDP to 3.0% in Q2, but June’s meagre 0.2% GDP expansion undershot market and RBNZ expectations by a clear margin.

Despite this, the up-thrust from a broad-based weakening in the USD ensured the NZD/USD spent most of the week on the ascendancy. Indeed, US markets’ growing expectation the Fed will usher in a fresh round of quantitative easing saw the USD slide to 7-month lows last week.

Looking ahead, this week’s mostly second tier data offering looks set to continue the recent dreary tone. Perhaps the most important release for the week will be Thursday afternoon’s NBNZ business survey. On balance, our gut feel is businesses’ optimism will ease a bit further. So the domestic picture should remain a drag on the NZD/USD this week.

However, we suspect a supportive global backdrop will limit any dips to the 0.7200 region.

Not only is USD sentiment in the doldrums, but investors’ risk appetite finished last week on a buoyant note. The MSCI World Equity Index recorded its fourth straight weekly gain and our risk appetite index (which has a scale of 0-100%) jumped from 51.5% to 57.5% on Friday. Appetite for “growth-sensitive” currencies like the NZD/USD is likely to remain solid early in the week as a result.

Our short-term valuation model currently implies a NZD/USD “fair-value” range of 0.7200-0.7400 and we suspect the currency will spend most of the week trading within this range.

Majors

The USD finished last week the way it began – on the back foot. Over the week, the USD index slumped 2.5% to the lowest level since February 2010. Last week’s USD losses mostly reflected markets pricing in a greater risk of a second round of Fed quantitative easing (QEII).

However, Friday’s USD slide was more about fading risk aversion as sentiment towards the global economy improved. An encouraging reading of the September German IFO business confidence index (106.8 vs. 106.4 expected) underpinned European stocks. The FTSE rose 0.9% and the DAX jumped 1.8%. US stocks continued the upbeat tone – the S&P500 surged 2.1% to be up nearly 9.5% for the month to date.

A 2%m/m gain in US durable goods orders (ex-transport) helped allay US double-dip recession fears, offsetting disappointing figures on new home sales. Against a backdrop of buoyant equity markets and fading risk aversion, investors trimmed positions in “safe-haven” assets. US bond yields increased 3-5bps and the USD and JPY weakened against most of the major currencies. As a result, EUR/USD and AUD/USD were propelled to fresh 5- and 26-month highs respectively. USD/JPY resumed its downtrend, skidding from 85.40 to below 84.30.

Earlier, a sharp drop in the JPY had raised speculation the Bank of Japan had intervened to sell JPY again.

However, authorities failed to confirm as much and Prime Minister Kan said over the weekend "I haven't heard that there was yet another intervention in the market".

Its worth noting, trade tensions between China and the US are heating up. Late last week the US backed a bid to allow US companies to seek tariffs on Chinese imports if China doesn’t properly allow the CNY to appreciate.

This has been followed by weekend reports suggesting China will soon impose anti-dumping tariffs on US chicken products. Looking ahead, Friday’s break below support at 79.60 on the USD index suggests more USD weakness may be in prospect for this week.

However, we suspect we’ll have to see upcoming US economic data continue to deteriorate to see speculation of further Fed easing continue to drag the USD lower. Friday’s personal income, consumer confidence and ISM manufacturing data will be worth watching in this regard. Markets will also be paying close attention to this week’s long line-up of Fed speakers, including chairman Bernanke’s testimony to the senate on Thursday. Near-term support on the USD index is eyed towards 79.00, with initial resistance at 80.10.

* Mike Jones is part of the BNZ research team.

All its research is available here.

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2 Comments

by Mark Thomson | 27th Sep 10, 3:11pm 1285553493

"Our short-term valuation model currently implies a NZD/USD “fair-value” range of 0.7200-0.740 and we suspect the currency will spend most of the week trading within this range."

Fair enough, though I suspect I'm not the only person who is more concerned about medium to long term prospects. A recent article by Harvard's Martin Feldstein may be relevant...

He suggests that Japan may face a significant saving crisis in the future that could greatly reduce its current account surplus and hence the capital available for investment in other countries. His argument is that Japan's enormous national debt (200% GDP) is currently manageable only because of their mild deflation which allows interest rates to remain low. But if this were to swing to merely one percent inflation, interest rates would rise to a degree that could potentially set off a spiral of increasing givernment debt and suck up the savings that currently gets exported to other countries.

How much Japanese money currently flows into NZ and how might the above scenario impact the NZ$?

markmthomson.net

by Donald MacRonald | 27th Sep 10, 4:17pm 1285557449

Gold surge to continue: Herston Economics

Published 2:48 PM, 26 Sep 2010 Last update 2:48 PM, 26 Sep 2010

QUICK SUMMARY | FULL STORY | GOLD | AUST DOLLAR

By a staff reporter

The current surge in the Australian dollar and the price of gold are set to continue, according to Herston Economics chief economist Clifford Bennett.

Mr Bennett, who accurately forecast the bottom of the market in March last year, told the ABC's Inside Businessthat the Australian dollar would not only reach parity with the US dollar, but exceed it.

"It's going to move way beyond parity to a range of $US1.03 to perhaps as high as $US1.08, $US1.12, in 2010," he said. "That's our target at Heston."

Mr Bennett warned Australian companies to prepare for a "long-term, multi-decade" shift in the valuation of the Australian dollar against the US dollar, due to local growth and extended low interest rates in the US.

"The US dollar is going to weaken and that is a good thing for the world and Australia, even, because it means that several of the global imbalances will be worked through in that way," he told Inside Business.

"It's really the rest of the world doing well that's going to rescue the US economy."

But gold would also continue to climb, as economic expansion in India and China, the two countries that value gold the most, leads an increase in demand, Mr Bennett said.

"We're bullish on gold, but for positive reasons... we're not bullish for the fear factors of double recessions or inflation or those sorts of things," he said.

Heston Economics' forecast is for the precious metal to climb towards $US1,450 to $US1,650 an ounce in the next 12 to 18 months.

Meanwhile, the company sees Australia's gross domestic product at 6.5 per cent in 2013, with inflation at around three to 3.5 per cent.

"We have to realise that you can have strong growth and low inflation," Mr Bennett added.

"That's a new concept, but I think the Reserve Bank is aware of that possibility."

"It's that stability in interest rates that Australia still needs – particularly on the domestic front – for at least another six months, so I'm hoping they'll stay on hold."
Gold surge to continue: Herston Economics
Published 2:48 PM, 26 Sep 2010 Last update 2:48 PM, 26 Sep 2010

QUICK SUMMARY | FULL STORY | GOLD | AUST DOLLAR

By a staff reporter

The current surge in the Australian dollar and the price of gold are set to continue, according to Herston Economics chief economist Clifford Bennett.

Mr Bennett, who accurately forecast the bottom of the market in March last year, told the ABC's Inside Businessthat the Australian dollar would not only reach parity with the US dollar, but exceed it.

"It's going to move way beyond parity to a range of $US1.03 to perhaps as high as $US1.08, $US1.12, in 2010," he said. "That's our target at Heston."

Mr Bennett warned Australian companies to prepare for a "long-term, multi-decade" shift in the valuation of the Australian dollar against the US dollar, due to local growth and extended low interest rates in the US.

"The US dollar is going to weaken and that is a good thing for the world and Australia, even, because it means that several of the global imbalances will be worked through in that way," he told Inside Business.

"It's really the rest of the world doing well that's going to rescue the US economy."

But gold would also continue to climb, as economic expansion in India and China, the two countries that value gold the most, leads an increase in demand, Mr Bennett said.

"We're bullish on gold, but for positive reasons... we're not bullish for the fear factors of double recessions or inflation or those sorts of things," he said.

Heston Economics' forecast is for the precious metal to climb towards $US1,450 to $US1,650 an ounce in the next 12 to 18 months.

Meanwhile, the company sees Australia's gross domestic product at 6.5 per cent in 2013, with inflation at around three to 3.5 per cent.

"We have to realise that you can have strong growth and low inflation," Mr Bennett added.

"That's a new concept, but I think the Reserve Bank is aware of that possibility."

"It's that stability in interest rates that Australia still needs – particularly on the domestic front – for at least another six months, so I'm hoping they'll stay on hold."