Opinion: NZ$ softens against A$ as Australian growth outlook strengthens

By Mike Jones The NZD has spent most of the past 24 hours in a 0.7150-0.7250 range. Having taken a bath over the past week, investors' risk appetite received some welcome respite from last night's batch of positive economic data. Both the Chinese and UK PMI's posted larger than expected gains, and remain indicative of expansion in their respective manufacturing sectors. In a similar vein, the US ISM manufacturing survey rose to 55.7 (53.0 expected) and gains in US home sales and construction spending also outstripped analyst expectations. Despite the upbeat data, equity markets were mixed and the USD shuffled broadly sideways. NZD/USD really just chopped sideways through most of the night. Both macro and leveraged accounts have shown continued appetite to unwind NZD positions over the past 24 hours, which has seen NZD/USD struggle above 0.7200. At the same time, speculative interest to sell NZD against the AUD has also weighed on the NZD. Last week's dovish undertones from the RBNZ really knocked the wind out of NZD/AUD, sending it below 0.8000 for the first time since August. And NZD/AUD has continued to trend lower this week, as today's RBA decision looms. Yesterday's upgrade to the economic outlook from the Australian Treasury further highlighted the gap between the NZ and Australian economies. The Australian Treasury is now forecasting annualised growth of 1.5% by the end of June 2010. For today, all the focus will be on the RBA rate decision at 4:30pm. Market pricing is consistent with a 25bps hike. However, if the RBA sounds particularly hawkish the market will likely again move to price in chances of a 50bps hike in future. Under this scenario, the AUD and the NZD could find more support. Results from Fonterra's latest online dairy price auction will be released tonight. Short-term support for NZD/USD will be found towards 0.7100, while initial resistance is eyed around 0.7270. Despite a slew of better-than-expected global data, the USD finished the night pretty much where it started. Economic data released over the past 24 hours has generally reinforced the notion that the global recovery is underway. Yesterday's Chinese PMI increased by more than expected in October, to 55.2. Meanwhile, the US ISM manufacturing survey "“ a key barometer of US economic growth "“ rose to 55.7 (53.0 expected) meaning the US manufacturing sector has now expanded for three straight months. US construction spending posted the largest gain in a year, while pending home sales surged 6.1% m/m in September (flat expected), no doubt influenced by the upcoming expiry of the tax credit for first home buyers. Ford posted a surprise profit in the third quarter (analysts had expected a loss) and raised their outlook for 2011, which added to the positive sentiment. After the heavy losses of last week, stock markets took some solace in last night's data. European bourses were up 0.3-1.5%. However, US stocks were mixed. The S&P500 is currently down 0.4%. Last night's better-than-expected data assuaged to some extent lingering doubts about the durability of the global recovery. The VIX measure of risk aversion (based on implied volatility of the S&P500) eased from last week's highs above 31%. Reflecting this, investors tentatively ventured back into "˜growth sensitive' currencies like EUR, CAD and AUD. Nevertheless, gains were relatively muted overall, as investors await decisions from the Fed, the RBA, the ECB and the Bank of England (BoE) later in the week. EUR edged back above 1.4800, while AUD spent most of the night flirting with 0.9000. CAD was among the strongest performing currencies, on the back of a 1.5% lift in oil prices. In contrast, GBP lost ground, falling below 1.6400 at one stage despite the better-than-expected UK PMI (53.7 vs. 50.0 expected). Traders are a little wary of placing further bets on the GBP ahead of a possible expansion of the BoE's quantitative easing program on Thursday. Looking ahead, lingering fears about the global outlook and elevated risk aversion are expected to keep the USD well supported on dips. In the short-term, support looks to be holding around the 76.00 figure. This should limit bounces in the EUR to the 1.4850 region for today. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.