Opinion: Kiwi$ drops with US stock market on weak US housing figures

By Mike Jones The NZD was knocked from its highs overnight, following a rebound in the USD and an easing in investors' risk appetite. After climbing to around 0.7575 yesterday morning, NZD/USD fell by around a cent to 0.7470. Over the past few days, the NZD has been caught in a "˜perfect storm' of rising risk appetite, increasing commodity prices and weakness in the USD. However, investors' appetite for risk hit a speed bump last night following signs the US recovery may be more tepid than some had been banking on. September's US housing starts and building permits both disappointed the market, and PPIs registered a surprise fall (-0.6% m/m vs. flat expected). As a result, US stocks largely erased the previous day's gains and risk appetite eased off its highs. Retreating risk appetite spurred demand for "safe-haven" currencies like JPY, CHF and USD at the expense of "˜growth sensitive' currencies like the NZD. The rebound in the USD was assisted by a 2% surge in USD/CAD following the Bank of Canada's (BoC) meeting overnight. The BoC left their policy rate unchanged (at 0.25%) but said CAD gains had "more than offset" signs of improvement in the economy. While most currencies came under pressure from the stronger USD last night, it is notable that the NZD tended to underperform against its peers. All of NZD/GBP, NZD/JPY, NZD/AUD and NZD/EUR drifted lower last night, perhaps reflective of the outsized NZD gains of recent days. Today's September's migration figures will likely continue the trend of higher net permanent inflows, mostly due to falling departures, while tourist visits could be up as much as 10%y/y, with ski field bound Australians by far the biggest driver of that lift. Growth in credit card billings will probably moderate in September, after August's big 1.6% increase, in line with the modest lift already seen in electronic card transactions. Decent appetite for NZD and AUD on dips should keep NZD/USD supported above 0.7400 for today. Meanwhile, sellers are expected to emerge on rallies towards 0.7550. A rebound in the USD saw all of the major currencies depreciate overnight. Gains in the USD were led by a surge in USD/CAD following the Bank of Canada's (BoC) decision to leave interest rates unchanged (at 0.25%) overnight. While the decision surprised no one, the BoC said its policy rate will remain on hold until the end of the second quarter of 2010. Some had expected the BoC to bring forward expected policy tightening. The Bank also registered it concern over the high CAD, saying its strength had "more than offset" signs of improvement in the Canadian economy. USD/CAD soared nearly 2% following the decision to 1.050 from around 1.030, and this paved the way for a more broad-based strengthening in the USD. Fears over the strength of the US economy and a negative day in stock markets also spurred demand for the USD as appetite for risk eased from its highs. US housing starts barely increased in September (+590,000 vs. +610,000 expected) while building permits actually fell, in contrast to expectations for an increase (+573,000 vs. +595,000 expected). US producer prices likewise came in on the weaker side of expectations, falling 0.6% m/m against flat expectations. Signs the US recovery may be sluggish weighed on US stocks markets, despite better-than-expected earnings announcements from Caterpillar and Pfizer. The S&P500 is currently down around 0.8% (and is now around flat for the week). Against the broadly stronger USD, USD/JPY popped above 91.00 and EUR fell below 1.4900, from levels close to 1.5000. GBP was nudged back below 1.6400, but losses were limited to some extent by better-than-expected UK public borrowing figures (£14.8b vs. £15.5b expected). Looking ahead, we don't think USD weakness will proceed at the same speed we have seen in recent weeks. Officials are becoming increasingly concerned over the weakening USD and rhetoric has been ramped up. Notably, a senior French official said overnight that "a euro at $1.50 is a disaster for European industry and the economy". Various other European officials, including Eurogroup chairman Juncker also reaffirmed the need for a strong USD last night. We may get further clues on the Fed's view on the USD from a speech on Monetary Policy from the Fed's Plosser tonight. The Bank of England's October Board minutes will also be released which will be scrutinised for any hint the BoE considered an expansion of its asset purchase scheme. For today, support on the USD index is seen towards the previous 14-month low of 75.20. Resistance is eyed around 76.00. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.