NZD strength driven by increased risk appetite as equity markets move up stongly

By Mike Burrowes

In some aspects it’s an orderly start to the week, with markets subdued by the bank holiday in the UK and the impact of Irene on New Yorks financial district.

The week has started with a “glass half full” approach from many traders and commentary and the NZD continues to benefit from this approach and mind set. The NZD set to open the day near the US0.8450 level, underpinned by “hot” money accounts – proprietary & technical accounts dominating our flow reports.

Appetite from this manner of accounts appears to have been spread across the market and is underpinning the risk trade at the week's start.

The appetite for the NZD sees it sustain gains on a TWI basis, with the NZDEUR near 0.5820 this morning, the NZDGBP at 0.5150 and NZDJPY just shy of 65.00.

NZDAUD is steady, with as yet little movement in rate expectations and spreads. The cross remains locked on a 79cent handle and we can have Building Approvals updates from both sides of the Tasman today – as well as the brand-new local monthly National Employment Indicator, in time this could become a useful lead to the quarterly HLFS.

However, most would view the key event on the local calendar as this Wednesday’s NBNZ business survey. While its sentiment reading is likely to have cooled noticeably, from July’s red-hot result, the big question is to what extent the latest global turmoil has buckled the survey’s own-activity indicators. But given these were exceptionally strong in July, only a big fall would begin to threaten our still-upbeat NZ GDP view.

Our own confidence survey, taken at a similar time, showed business confidence slumped from a net 45% who were optimistic about their lot, down to a net 22%. The July National Bank survey stood at +47.6% for headline business confidence. We would expect this to drop to a similar level as the BNZ survey.

Also to consider this week is Thursday morning’s Overseas Trade Indexes for Q2. We expect further decent gains in their export and (core) import volumes, along with a fresh 37-year high in the merchandise terms of trade.
Thursday afternoon’s ANZ commodity price results, for August, will be the first set to indicate impacts from the global ructions.
 
Overnight we have seen a bright start to the week for European and US equity markets, with gains of near 2.5% helping to colour the mood around FX markets.

European bourses encouraged by news of a merger in the Greek banking industry and by the tail end of last weeks activity which saw Wall Street post gains after Bernanke’s Jackson Hole address. Risk appetite in Europe comes despite commentary focused on the division of views amongst various European officials and politicians on managing liquidity and solvency in the EU.

The CHF is a notable loser to start the week, with talk that Swiss banks may soon charge customers a “temporary excess balance fee”, a move that will sit well with the SNB. Underlying demand for the CHF as a haven is expected to temper any weakness. European commentary continues to highlight the challenges faced across the continent.

After his sabre rattling address at Jackson Hole, Trichet sounded more conciliatory, saying the ECB is going to review its assessment of inflation risks after growth in the 17 nation euro area has slowed. The findings with regard to the medium term outlook for price developments will be released in early September, Trichet noted, as he spoke to the European Parliament’s economic committee.

The EU’s Rehn also attracted attention; he said he is seriously concerned that financial turbulence could impact the broader economy and he flagged the likelihood that the EU will cut its 2011 growth forecasts. The EUR saw out most of the night with a 1.4500 handle, consolidating thanks to demand on some cross rates, though constrained somewhat by the commentary from Trichet and Rehn.

Worth noting tonight is an Italian bond auction. After two weeks of direct support in their bond market, the appetite for this will be closely watched as the ECB is unable to directly bid in the auction. Also on this week’s calendar are auctions from Spain and France.

There was a fairly busy calendar of US data to start the week – not forgetting we finish the week with monthly Non-farm Payrolls.

Last night saw the release of monthly Personal Income & Spending numbers, the latter printing at +0.8% versus +0.5% expectations which helped those favouring risk trades and coloured equity and US treasury market trading on the day. Market sentiment conveniently overlooked a weak update on monthly Pending Home Sales, -1.3% versus expectations of -1.0%, as well as the worse than expected Dallas Fed Mfg update of -11.4 (-9.0 expected).

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.