NZ$ falls back to earth after surprise Chinese interest rate hike

NZ$ falls back to earth after surprise Chinese interest rate hike

NZ$ falls back to earth after surprise Chinese interest rate hike

By Mike Jones*

After climbing to nearly 0.7600 yesterday, the NZD/USD crashed back to Earth last night. A surprise Chinese interest rate hike put the kibosh on investors’ risk appetite, knocking NZD/USD back below 0.7500.

Early in the night, solid appetite for NZD and AUD from commercial and real money players underpinned the NZD/USD. And an upbeat German ZEW economic confidence survey ensured investors’ risk appetite remained well supported.

However, China’s unexpected rate hike saw sentiment turn on a dime. For the first time in nearly 3 years, the People’s Bank of China raised its benchmark 1-year lending and deposit rate by 25bps, spurring speculation Thursday’s Chinese growth and inflation figures could be uncomfortably strong.

Rising global growth concerns in the wake of the Chinese announcement saw US stock indices dive almost 2.0%, while fears of reduced Chinese commodities demand knocked the CRB index (a broad index of commodity prices) down around 1.9%, driven by a 3% slide in oil prices. Meantime, our risk appetite index (which has a scale of 0-100%) slipped 2 percentage points to 65.3%.

Against a backdrop of sliding commodity prices and rising risk aversion, investors trimmed long positions in “growth-sensitive” currencies like AUD and NZD in favour of the relative “safe-haven” offered by the USD and JPY. NZD/JPY skidded from 61.50 to below 60.80, helping drag NZD/USD below 0.7500. Still, the AUD was hit relatively harder given Australia’s higher exposure to Chinese growth. As a result, NZD/AUD was propelled from 0.7650 to above 0.7700.

Last night’s Fonterra online milk price auction result broadly aligned with our expectations. Prices slipped a further 2.5%, on top of the 1.3% fall in the last auction. For today, initial support on NZD/USD is eyed around 0.7410.

Resistance will be found towards 0.7550.

Majors

The USD strengthened against all of the major currencies overnight after an unexpected Chinese rate hike sent markets into a tailspin. The People’s Bank of China raised its benchmark 1-year lending and deposit rate by 25bps, the first rise in almost three years.

Fears tighter Chinese monetary policy could dampen Chinese and global growth took a heavy toll on sentiment. Equity markets and commodity prices tumbled, bolstering appetite for “safe-haven” currencies like the USD and JPY at the expense of “growth-sensitive” currencies like AUD, CAD and NZD.

Oil and gold prices both fell just over 2%, the Eurostoxx 50 European stock index declined 0.5%, and the S&P500 slipped 0.9%. The CRB index (a broad index of commodity prices) ended the night down around 1.3%.

Another bout of position squaring by speculative and leveraged accounts only amplified the USD’s gains. USD/JPY posted the biggest one day rise since the Bank of Japan’s 15 September intervention, while the EUR, GBP and CHF all notched up losses of 1.0-1.1% against the broadly stronger USD. Not surprisingly though, the AUD was hit the hardest given Australia’s heavy exposure to Chinese growth and commodities demand. From around 0.9900, the AUD/USD dived 1½ cents to below 0.9750.

Prior to the shock Chinese announcement, the USD had already been on the ascendancy. US Treasury Secretary Geithner did his best to assure markets the US was not running a weak USD policy, saying the US will work to “preserve confidence in a strong dollar”.

More dovish rhetoric from US Fed officials did little to disrupt the stronger USD trend, supporting our supposition quantitative easing II is close to fully priced. Atlanta Fed President Lockhart repeated his call for aggressive Fed action, suggesting the new asset purchase program could amount to US$100b per month. Fed officials Evans and Dudley espoused similarly dovish sentiments.

The Bank of Canada left its benchmark interest rate unchanged at 1% overnight, as expected. However, the BoC slashed its growth forecasts for 2010 and 2011 and said "the economic outlook for Canada has changed." The more downbeat economic assessment saw USD/CAD leap from 1.0200 to above 1.0350.

Looking ahead, the GBP will be vulnerable to any talk of additional QE from tonight’s Bank of England minutes, while the Fed’s Beige Book and a speech from the Fed’s Lacker will help shed more light on the US outlook. For today, the USD index is expected to find support on any dips towards 77.30 given the rising risk aversion backdrop.

 

* 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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No matter how much the rates rise in China, they will keep on bidding the USD up. So the Yuan will stay "undervalued" against the USD. And China's growth will still be the outperformer. The difference is that now they can't be called manipulators.

Your quite wrong there Michael....they can be called anything the world media and their controllers want to call them .....and they will be for what it is worth.

The problem is that many here including Bernard only see this as a monetary  and trade advantage situation from which America cannot  gain any vantage point.

The posturing of the Americans of the last 12 months is about to take shape....the calling in of the (global Marshall) debt in seeking out it's allies in an attempt  to gain some leverage or at worst to strangle the problem.

The Chinese ( I believe) have made an unprecedented move believing the Global Market will respond more to monetary disruption..... than to their allegiances.......in that they are mistaken.......(save France)....but then you never know where you are with them uh?

I will ask Bernard to post on ten at ten a statement from Gillard yesterday in regard to Australia's stay in Afghanistan.........it had nothing to do with Afghanistan.....listen to what she says........she sent a very clear message and one you will hear repeated in the coming months from many parts of the world......

Would Australia sacrifice the strength of their economy for "their ally"  ....you bet your ass.

As a consequence we will oblige accordingly.....

It's getting rough and about to get a lot rougher.

Then I must be just an inocent as the chinese... hey you are implying a lot of things there and they don't sound nice ... more like the trade war escalates to a pushy level.

Michael....I have been implying things for a long time here....because "that" is the very nature of International Diplomacy....it's all implied until a conclusion is reached or confrontation is unavoidable.

You may be innocent.....? but China...no China are in the game  to win and there is no place for innocence there.

If history is any good at looking into the future then you could be right...wish you weren't... the west has never ended in good terms with the Chinese, they are to goood at making money and that is unacceptable...  for a New York banker.

BTW, I understood that NZ's recovery was strongly linked to Australia, if the Aussie is going to get hit what can we expect for the Kiwi ?

"US Treasury Secretary Geithner did his best to assure markets the US was not running a weak USD policy, saying the US will work to “preserve confidence in a strong dollar”."

Yeah Right....

Like I have said for a long time, China has been setting themselves up as a major economic power and their currency to be a major trading currency 

They have made several threats and taken a couple major overnight buy ups in the last 4 yrs to flex their muscles and show the US who is the real boss. This is between the US and China, anything else is just collateral damage, which China takes into a/c limiting as much as possible other wise they threaten their raw material supplies.

As far as having an effect on their growth etc, they may do so , on the short term, and calculated into the overall manuvering.....

China warned the US about printing money...the US didnt take heed, the whitewash statement above didnt hold water... A gentle reminder.

OK, worst case scenario, were do NZ and Oz stand, they are major chinese suppliers, the shit hits the fan will they keep selling to China or will they give their resources in exchange for fiat USD ?

Michael they N.Z. and Australia will fall into line regardless of it being detrimental to respective economies.................take that to the bank......

And as Steps has said.....collateral damage on a whole new level.

The Chinese strategy of neutralizing all US$ earnings within China is an unfair trade practice and boils down to cheating.

What happens is that factories exporting to the US are not allowed to keep the US$ they earn . The US$ are ' 'handed in' to the Government in exchange for Yuan.

This has three effects , it removes all US$ from the domestic market thus preventing US companies supplying any inputs to Chinese factories.

All commodities from milk to coal are bought by the State  using the real money , the rest is squirrelled away. 

It boils down to Chinese factories earning US $ but being paid with Yuan , this would be like being paid in Monopoly money  by your employer in New Zealand .

It means the Chinese can invest all this 'real' US$  money it earns , without any actual expense other than the cost of running a printing machine to print Yuan.

Its so ingenious , that I am surprised no one else does it. 

The average Joe American does not even have a clue about this rort , but they are feeling the effects. They cannot compete with workers who earn monopoly money , work 70 hours a week in shocking conditions and who have dire consequences for not meeting production targets 

"The Chinese strategy of neutralizing all US$ earnings within China is an unfair trade practice and boils down to cheating."

Fair????  this is the real world, not a school yard or a Uni with students bleating ..... what should be and what is, are been 2 very different things..thats the way things have been for millennium

"Its so ingenious , that I am surprised no one else does it. "

The average Joe American does not even have a clue about this rort , but they are feeling the effects. They cannot compete with workers who earn monopoly money , work 70 hours a week in shocking conditions and who have dire consequences for not meeting production targets "

Hell even the US government (or should I say the big business lobbyists) didnt wake up till it it was too late, and anyone who did has cried wolf be it in the US or even here...."ramblings of a left winger, communist, doomsayer..." attitude reigns doesnt it....

It seems to me that the Chinese government is doing what it is supposed to do-it is acting in the best interests of it's citizens and its nation. I expect our government to behave in the same way- doing what is best for the residents and citizens of New Zealand. Why should we work to provide pension money for Canadian school teachers, remitences for English millionaires, profits for New York currency speculators etc? When the shit hits the fan, it will be the isolated, protected economies that survive- not those who have dropped all of their barriers. I am not talking about living like Utah survivalists- but we all lock our car when we park it, are careful about talking to strangers, keep our wallet in our pocket when in public places and most of our clothes on unless we feel completely at ease!

I tell my kids to be sober, careful and responsible. Have fun but, above all else, be safe. I would say the same thing to our government.

What would the Chines government have done to Hubbard and the other NZ finance company geniouses? They would not be getting knighthoods!!

It seems to me that the Chinese government is doing what it is supposed to do.  It is acting in the best interests of it's citizens and its nation. I expect our government to behave in the same way- doing what is best for the residents and citizens of New Zealand. Why should we work to provide pension money for Canadian school teachers, remitences for English millionaires, profits for New York currency speculators etc? When the shit hits the fan, it will be the isolated, protected economies that survive- not those who have dropped all of their barriers. I am not talking about living like Utah survivalists- but we all lock our car when we park it, are careful about talking to strangers, keep our wallet in our pocket when in public places and most of our clothes on unless we feel completely at ease!

I tell my kids to be sober, careful and responsible. Have fun but, above all else, be safe. I would say the same thing to our government.

What would the Chines government have done to Hubbard and the other NZ finance company geniouses? They would not be getting knighthoods!!

Learn To Soc..."It seems to me that the Chinese government is doing what it is supposed to do.  It is acting in the best interests of it's citizens and its nation. "

 

Excellent....now if you could just get another 400 million Chinese to believe that they would not need the .....army ....secret service....rules to govern the enlightenment of citizens....policed by paranoid Party paid thugs.