Opinion:NZ dollar rises over 75 USc as US dollar weakens amid growing 'currency war' tensions ahead of key IMF meeting

Opinion:NZ dollar rises over 75 USc as US dollar weakens amid growing 'currency war' tensions ahead of key IMF meeting

By Mike Jones*

Against a broadly weaker USD, the NZD/USD climbed to a fresh 11-month high above 0.7500 overnight.

The battered and bruised USD took another knock overnight, as talk of additional monetary stimulus continues to undermine the currency.

A weak reading on the US labour market from the September ADP employment report quashed hopes for a solid non-farm payrolls report on Friday. And the Fed’s own Evans (Chicago Fed President) suggested “much more” stimulus is needed.

US interest rates plunged, in the case of the 2-year Government bond yield to all-time lows around 0.38%. As a consequence, investors ditched the USD in favour of higher-yielding currencies like the EUR, AUD and NZD.

Sliding US interest rates saw NZ-US 3-year swap spreads widen to 2-month highs around 315bps overnight, and the extra yield advantage helped underpin last night’s NZD/USD gains.

The only currency not to feel the impact of the softer USD was the GBP, reflecting speculation the Bank of England may join the Fed in restarting quantitative easing this year.

With GBP/USD trapped in a sideways 1.5840-1.5940 range, NZD/GBP was propelled from 0.4690 to nearly 0.4750 overnight.

Looking ahead, NZD/USD is starting to look overextended on the basis of NZ ‘fundamentals’ (our short-term valuation model implies a 0.7250-0.7450 “fair-value” range).

This raises the risk of a near-term pull back. However, positive momentum and widening NZ-US interest rate differentials mean we suspect we’ll see further gains first, and solid NZD/USD demand is expected on any dips.

For today, initial support on NZD/USD is eyed around 0.7445. Keep an eye out for the ever-volatile Australian employment data due out at 1:30pm (NZT). A 20,000 jobs gain is currently expected.

Majors

Similar themes prevailed in currency markets overnight. The USD continued to tumble, providing a default lift to most of the major currencies. Bearish USD sentiment was reinforced by more talk the Fed will have to restart quantitative easing later this year to revive the flagging US recovery.

Not only did a decidedly grim US ADP employment report reveal a loss of 39,000 jobs in September (+20,000 expected), but Chicago Fed President Evans (a non-voter) said “much more” monetary easing is necessary.

Reflecting these factors, US bond yields plunged, dragging the USD lower. Ten year US Treasury yields fell 11bps to 2.35% – the lowest since January 2009. Meanwhile, 2-year yields slumped to fresh all time lows around 0.38%.

Against the broadly weaker USD, the JPY was propelled to fresh 15-year highs. We have noted that falling US-JP bond yields represent a sizeable impediment for the Bank of Japan’s attempts to weaken the JPY. And, indeed, last night’s slide in USD/JPY was accompanied by a 22-month low in US-JP 2-year bond spreads (of around 25bps).

EUR sentiment was buoyed not only by the weaker USD but also a 3.4%m/m jump in August German factory orders (0.9% expected). These positive influences more than offset the impact of simmering sovereign debt tensions (ratings agency Fitch downgraded Ireland’s sovereign rating one notch to A+ overnight), and EUR/USD made a new 8-month high above 1.3900.

The CAD was one of the night’s star performing currencies, thanks to a stellar September PMI (70.3 vs. 62.0 expected). From around 1.0160, USD/CAD dived to nearly 1.0060 in the wake of the data – the lowest since April.

It’s worth noting that, as the USD continues to slide, tensions about global “currency wars” are beginning to heat up ahead of this weekend's semi-annual IMF meeting.

This follows rumoured intervention by numerous Asian central banks to stem gains in their currencies and Brazil’s recent move to increase taxes on foreign investment.

Overnight, US Treasury secretary Geither lambasted “emerging economies that both remain undervalued and are leaning heavily against appreciation”.

IMF chief Strauss-Kahn also cautioned against using exchange rates as a “policy weapon” yesterday, suggesting such "would represent a very serious risk to the global recovery."

All the while, China continues to rebuff calls its currency is overvalued.

* Mike Jones is part of the BNZ research team. 

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Job losses in export market predicted for January/February....companies will hang on for as long as they can but it is choking the life out of them.  Bollard will come out with same old BS...take two disprin close your eyes and hope it all goes away by it's self.

Notice English is shutting up as well..he has no idea.

…and what is your idea to solve the problems FCM ?

move to china

No need ! Been to the Warehouse lately ? It appears that China is moving to us .

Nice one

"All the while, China continues to rebuff calls its currency is overvalued".

Doesn't he mean they rebuff calls (from outside China) that the Yuan is undervalued?

My goodness, these economics are confusing, non?

good spot Kate but from Jonesy's track record it was probably intentional.

All this talk of war. I think our best option is to roll over and surrender as soon as we see an opportunity.  Hell, lets not draw out the pain, we give up.

We gave up ,  surrendered , in the 1980's when P.M. David Lange said that it was time for a cuppa ........... and then he sacked Roger Douglas ............. NZ has been twiddling it's thumbs , having a tea-party , ever since .

I think the party is over

Crikey.....I missed it .....got stuck in traffic in the eighties......is there gonna be an after party party..?....................cause I'm here now and you wouldn't like me when I'm bored.

Could be a nasty hang-over , after the property party ends .......... Although kindly Uncle Olly has put on another Val Doonican album , and brought out a tray of lamingtons . Tuck in , guys !

Come on ...he's James Last man if I ever saw one....big band ....big sound....and you get  a

whistle and sparkles(for your jacket no glue provided) with every back ordered album. 

That Mantovani is an excitement machine........

I think its the first time in history that the trust in all fiat currencies are being eroded at the same time.

go to 90 at 9 JP...I posted a piece on it at the top o the thread.....any thoughts.?

Christov, how did you miss it. It was huge all the guys around here went. It were they got to swap their income for a loan to buy land and get into the capital gain game. Now they have no income and declining capital values. The headaches are bad and many are hiding in the back 40.  No doubt cleaning the grandfathers old 303 for next time the bank manager drops in to say, 'we didn't force you to borrow money,its not our fault all the blame belongs with you . You were greedy and stupid.

Boom! 

Wow AndrewJ.....those Banky Boys sure know how ta party......and now they want the

revellers to pay for the damages ya say....?....well who was pouring the wine......and when

the frig did Jesus show up and turn the wine to stagnant water...? and why did they keep

drinking...? didn't their Pappy tell em you don't gotta eat shit to know it tastes bad...?

whhooooooeeee....Them Banky Boys is overdue fer a comeuppance...! 

Off topic:

With a fast changing world - visionary new ideas are necessary to tackle economic and other problems. Politicians are in many ways on the forefront introducing changes. It seems when urgent solutions are required, unfortunately they can’t keep up with the speed of  internal and worldwide developments. That needs to be changed.

Bernhard why not have each week one of the leading politicians on your blog with an issue – anserwing 10 robust questions and some valuable suggestions ?

A general question: Why are in this country leading politicians not more often facing the public through the media with questions and suggestions ? Replacing a few weekly violent TV programs by interesting and educational "1 hour of politics", would be very helpful for all of us.

A different politician ...... Not David ( Don't call me Cunny ) Cunliffe each week !

..leading politicians Rogie.. not just politicians.

........... ummmmm , who'd that be then , Walter ? Goofy and Kingfish ........ ha ha de ha ! Jonkey and English ...... pbsssssst ! ................... Cousin Rodney , Dr Sharpy , Stormin' Norman ................. nyuk nyuk nyah !!!!!!!!!!!!!

[ Tim Shadbolt for P.M. : Even Timmy makes more commonsense than that lot , above ! ]

Well that depends on where they are leading us Walter.....as to Kun Li don't underestimate his ambition my friend....he is ...the lady in waiting or something of that nature.

By the By Walter can you have a chat to Roger....I think he's got pissed and is running amok about the site in an effort to offend.

Only 10:22 a.m. here ! Gummys don't get rat arsed until 11:30 at least .

And I'm still not banned !

[ that Hickey is a patient fellow , ain't he .............. for a nincompoop central planning border up the windows sort of a pond dwelling socialist scum sucking plonker ]

look your not supposed to be reading Walters mail.......further more it is now obvious it being 10.22 AM local time Panay Bay that you have been up all night planning this self destruct mission and are therefore sleep deprived.........so go to bed or help dig a hole or pick up a rock and smash your laptop to pieces.......lets know if that did not work.

Which sobriquet do you prefer for our mournful maestro :

The Merchant of Doom ( Olly Newland's description of BH ) ........ or.......

Chicken-Little Hickey ( Gummy Bear contribution ) ???

............ Marc Faber has " Dr. Doom " as his title . Any suggestions for Bernard ?

I gotta go now ....so just in case ...you know....it's been great from time to time and if I'm ever up that way.......make sure you got ice yeah..? Good luck to you and yours Roger.

" 30 % Down " ............ well call him that !

Say " 30 % down " to anyone in NZ ,and they'll reply , " oh , you mean Hickey .... yeah , him ! "

noted

Obviously Rogie is very sharp/ fiery right now. So why we not use him as “TheFirstImpressiveFfrontrunner” running down from the Botanical Garden screaming and yelling nude towards the Beehive the 27th of November when “The Viva Revolutions" is beginning ?

Because Walter he will have self destructed prior to that date given his current inertia.

He is in dire need of a Capitalist injection to restore his levels of tolerance ....... and running the toeshine boys at Panay Bay just ain't cutting it...... so I'm going to bail for the day and hope things calm down a wee bit. .

When I say we should roll over and give up, I dont mean bent over and take it.

http://gregpytel.blogspot.com/2010/09/financial-system-as-we-know-it-is-...

Whats happened to the war between supermarkets...pac n save today was positively weird, some $5.00 special thing that I couldnt find, and no specials anywhere on the shelves... The prices on everything were way and above plus another 2.5%. This increase in GST seems to have encouraged them to go nuts. Not what I expected.