Opinion: Kiwi$ solid on rate hike talk, but BNZ sees slower, later hikes than market

By Danica Hampton NZD/USD has spent most of the past 24 hours trading choppily within a 0.7300-0.7420 range. The NZD was bolstered by yesterday's upbeat retail sales data. August's nominal sales grew 1.1%m/m and core spending fared even better rising 1.2% for the month. This suggests the rebound we've seen in consumer confidence over recent months is translating into actual spending, which reinforces our view that the New Zealand economy is steadily regaining its footing. The retail results reinforce our expectations that the RBNZ will end up hiking earlier than it signalled in its September MPS. We remain comfortable with our view of the RBNZ delivering the first hike in mid-2010 (this is much less hawkish than market pricing, which is consistent with a 25bps hike in January). The NZD/USD extended its gains last night and climbed briefly above 0.7400. The backdrop of firmer commodity prices (gold prices found a fresh high above US$1060/oz) and a generally weaker USD (thanks to a slide in US interest rates following downbeat comments from the Fed's Vice-Chairman Kohn) helped buoy NZD/USD. However, the NZD/USD strength didn't last. While Johnson & Johnson beat earnings estimates, the detail wasn't quite as good as the headlines. Worries about US commercial lender CIT also weighed on investor sentiment. Modest losses across global equities tempered risk appetite a little and profit-taking saw NZD/USD slip back below 0.7350. Today the state of the Government's finances will be laid bare in the year-to-June accounts (due 10am). We suspect these will stay fairly true to Budget forecasts and feature some fairly dismal looking underlying cash flows (although improvement in financial markets in the latter stages of the fiscal year will help headline results). For today, we continue to think NZD/USD will struggle to above 0.7400. Initial support is seen ahead of 0.7300. But a break below Monday's low of 0.7250 will suggest the downward momentum is gathering pace. The USD nudged a little lower against most of the major currencies last night. Fresh highs in commodity prices and downward pressure on US interest rates weighed on the USD, despite lacklustre data out of Europe and modest losses across global equities. Concern about global inflation helped underpin commodity prices last night. Gold prices hit a new record high of more than US$1,060/oz and crude oil prices rose above US$74/barrel. US interest rates slipped lower last night following the Fed's Vice-Chairman Kohn's downbeat view on the US recovery and the inflation outlook. 10-year government bond yields fell 6bps to 3.32% and reduced interest rate support weighed a touch on the USD. EUR/USD climbed from below 1.4680 to nearly 1.4880, shrugging off a disappointing German ZEW Survey. The economic sentiment indicator fell to a 3-month low of 56.0 in October (vs. 58.8 forecast), while the current situation index rose to just -72.2 (vs. -69.0 forecast). However, EUR/USD stalled around the 1.4880 region, perhaps hindered by comments from the ECB's Noyer, who warned there was no current alternative to challenge the USD's status as the main reserve currency. It was a whippy night for GBP. Initially, GBP/USD fell from above 1.5800 to nearly 1.5700 after softer-than-expected UK CPI data. Annual CPI rose just 1.1%, below analyst forecasts for 1.3%. Benign UK inflation simply reinforces the notion that UK interest rates can remain at very low levels for quite a while yet. However, GBP/USD swiftly rebounded about 2 cents to above 1.5900 after comments from Bank of England Deputy Governor Bean. Bean said that activity in the UK has "probably troughed" and "worst downside risks look unlikely to crystallise". Equities posted modest losses last night as investors focus on upcoming Q3 earnings reports from financial firms. Johnson & Johnson reported better-than-expected profits last night, but the detail wasn't quite as good as the headlines. Worries about commercial lender CIT Group (after the CEO said he would step down at the end of the year) also weighed on sentiment. The S&P500 is currently down 0.5%. There will be plenty to keep an eye on over the next few days. JP Morgan Chase, Goldman Sachs, Citigroup and Bank of America will announce Q3 earnings. While on the economic front, US retail sales and the FOMC minutes will be released tonight. While we've seen a bit of volatility in the past 24 hours, the USD Index continues to find solid support on dips towards last week's low of 75.75. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.