Opinion: Kiwi$ dribbles lower as US risk appetite wanes

By Mike Jones The NZD dribbled lower on Friday night. Broad-based gains in the USD and a slight retrenchment in risk appetite saw NZD/USD slide from around 0.7450 to closer to 0.7400. Worse than expected profit announcements from General Electric and Bank of America weighed on global equity markets on Friday night. Slightly softer US consumer confidence (69.4 vs. 73.1 expected) added to the dour mood such that the S&P500 and the Dow both fell around 0.7%. European equity indices were down between 0.6 and 1.5%. Doubts about the strength of the US recovery took a toll on risk appetite and the USD ground steadily higher as positions in "˜growth-sensitive' currencies were wound back. Comments from US Treasury secretary Geithner that global confidence in the US remains high also helped support the USD. However, solid demand for NZD/JPY helped limit falls in NZD/USD. Demand for NZD/JPY on dips was noted from a mix of real and leveraged accounts last week, and no doubt helped NZD/JPY reach new 1-year highs above 67.00. Strength in GBP continued on Friday following comments from BoE officials that the BoE's quantitative easing programme appears to be working. As a result, NZD/GBP finished the week down almost 2.5% at nearly 0.4520. We suspect downward momentum in NZD/GBP will gather pace in coming weeks as investors come around to the view that prospects for the UK economy are improving. Undoubtedly, recent gains in NZD/USD have been assisted by the trend weakening in the USD, not to mention the rampant AUD. But it's worth noting that NZ fundamentals have become increasingly NZD/USD supportive as well. At 56%, our risk appetite index (which has a scale of 0-100%) remains around the highest levels in 15 months. Meanwhile, NZ 3-year swap rates surged over 25bps last week, propelling NZ-US 3-year swap spreads to nearly 330bps. Putting these factors into our models yields a short-term "fair-value" range for the NZD/USD of 0.7170-0.7370. We still think the market is far too hawkish on the outlook for RBNZ policy "“ there is little chance of a rate hike by January (as is now priced by the market) in our view. But with relatively little on the horizon in the short-term to alter market views, we think the NZD/USD will continue to be bought on dips. This is particularly so given the trend weakness in the USD. Initial resistance will be found close to the 0.7500 figure. This week is a relatively quiet one on the local data front with only second tier data due to be released. As such, near-term direction in NZD/USD is likely to come from offshore. In particular, whether or not equity markets can hold recent gains as the US corporate earnings season continues. The plethora of Fed officials speaking this week will also be interesting in terms of the outlook for US interest rates, and hence the USD. The USD ground higher against most of the major currencies on Friday night. Equity markets retraced some of last week's strong gains on Friday as weaker-than-expected data and corporate earnings reinforced concerns the US recovery will be gradual. General Electric reported a 20% fall in revenue in Q3 to US$37.8b, below the US$39.5b analysts had expected. Bank of America posted a $US1b quarterly loss, driven by credit losses on its consumer loans. The latest read on US consumer confidence also served to dampen sentiment. The University of Michigan survey fell to 69.4 in October, against expectations of a more modest decline. This more than overshadowed a small increase in September industrial production (70.5% vs. 69.8% expected). US stocks fell around 0.7%, while European indices were off 0.6-1.5%. Fears about the strength of the US recovery and declines in equity markets took the edge off risk appetite. In this environment, investors were happy to indulge in a bit of profit taking after the strong gains seen in most major currencies last week. As a result, the USD edged higher against most of the majors. Comments from US Treasury secretary Geithner may have also helped USD sentiment. Geither said the US must work to preserve the USD's status (as the world's reserve currency) and that global confidence in the US remains high. The GBP was the strongest performing currency last week and gains continued on Friday, despite the firming USD. After starting the week below 1.5850, GBP rose to above 1.6350 on Friday. Strength in the GBP has come amid renewed efforts from Bank of England (BoE) officials to express confidence in the UK economy and BoE measures to prop it up. In this regard, MPC member Fisher said the BoE's quantitative easing programme appeared to be working and was having the desired effects on the economy. Traders betting on further GBP weakness have been caught out by the recent bout of GBP strength, which has exacerbated the rise in GBP. For the coming week, we suspect further USD weakness could be in store. The trend recovery in global growth and risk appetite looks set to continue and sustained gains in US interest rates remain some way off yet. However, there is plenty of event risk to watch out for this week. While the US data schedule is fairly light, there is a tidal wave of Fed speak for investors to chew over (including three speeches from chairman Bernanke). UK and Chinese GDP (for Q3) and the German IFO will be important data wise, while the minutes from the RBA and BoE's recent meetings will also be released. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.