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.
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.