Opinion: Kiwi$ holds above 71 USc ahead of OCR and Fed rate decisions

By Danica Hampton The NZD was the worst performing currency last week. NZD/USD fell about 4%, from above 0.7400 to below 0.7100. The NZD seemed to be hit by the perfect storm last week. Globally, investors became risk averse amid worries about European sovereign solvency and China's attempts to slow growth. Lacklustre US corporate earnings and Obama's plans to curb bank speculation also weighed heavily on equity markets. The S&P500 fell nearly 4% last week and our risk appetite index (which has a scale of 0-100%) fell from 69% to 48%. Against this backdrop, investors ditched growth sensitive currencies like the NZD in favour of the relative safety of the USD. The local news simply added to the weight on the currency. Yes, November's retail sales data beat expectations. But, the REINZ data suggested housing market activity is slowing and Q4 CPI showed that inflation pressures remain benign. All in all, it aligned with our view that the RBNZ can wait until mid-year to begin tightening "“ a message we expect the RBNZ to reiterate this week. After finishing last week around 0.7100, the NZD/USD rebounded a little on Monday. Sentiment towards growth sensitive currencies was helped by rumours suggesting Fed Chairman Bernanke will be appointed for a second term and new reports suggesting Obama will announce new stimulus measures at this week's State of Union address. Wall Street recovered some of last week's losses and the S&P500 is currently up 0.8%. While worries about the global outlook may keep the NZD/USD fragile early in the week, we continue to think dips will be limited as the outlook for NZ growth stacks up favourable relative to our trading partners. The RBNZ is likely to hose down expectations for near-term rate hikes at Thursday's OCR Review. But we expect this week's FOMC statement to deliver a similar message and this may well result in another bout of USD weakness. For today, expect dips to be limited to 0.7100. Headwinds are expected towards 0.7175-0.7180. Risk aversion triggered a bounce in the USD late last week. However, the USD stabilised last night. On Friday night, worries about the White House's plans to curb bank risk-taking took a heavy toll on financial stocks. At the same time, a disappointing earnings result from Google weighed on the technology sector. All up, the S&P500 fell 2.2% on Friday night and finished the week down nearly 4%. Against a backdrop of sharply weaker equities, risk aversion saw investors favour the relative safety of the USD. Lingering concerns about sovereign solvency in Europe and China's recent steps to contain asset bubbles added to the weight on growth sensitive currencies. The USD Index climbed about 0.5% from a smidgen above 78.00 to above 78.50. While growth-sensitive currencies like AUD and NZD found new lows, below 0.9000 and 0.7100 respectively. However, investors managed to shrug off Friday's fragility on Monday. Investor sentiment was cheered by rumours Bernanke would likely be reappointed as Fed Chairman and news reports suggesting President Obama will detail new stimulus measures (aimed at helping middle class families) in this week's State of Union address. Overnight, Wall Street recovered some of last week's losses and the S&P500 is currently up 0.8%. Easing risk aversion (thanks to the rebound in global equities) and disappointing US data (existing home sales fell 16.7%m/m in December, worse than the -10% drop forecast) conspired against the USD. In fact, the USD Index sank briefly below 78.00. EUR/USD spent the night around 1.4150, well above last week's low of 1.4030. The coming week is packed full of event risk, which should help steer the direction of currency markets. The Senate is expected to vote on whether to reappoint Bernanke for a second term and Obama will give his State of Union speech on Thursday. We're also slap bang in the middle of the US corporate earnings season (companies like Apple, Amazon, Boeing and Microsoft are all reporting this week). However, the key event will probably be the FOMC meeting, which should set the USD's direction. The Fed is widely expected to leave both policy unchanged and maintain the "extended period" line in describing how long they will keep rates at accommodative levels. Given the labour market remains weak and inflation pressures benign, we suspect those looking for hints as to when the Fed will start to tighten policy will be disappointed. As such, we wouldn't be surprised to see a bout of USD weakness towards the end of the week. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.