Opinion: Enough good news in last 6 weeks to keep RBNZ from cutting OCR

By Danica Hampton NZD/USD climbed to within a whisker of 0.6900 on Friday night. A solid performance from US equities and a fairly upbeat US non-farm payrolls report helped bolster risk appetite. As a result, growth sensitive currencies like NZD and AUD climbed against "safe-haven" currencies like the USD and JPY. But NZD really just rode higher on the coat-tails of the AUD. Heavy corporate demand for AUD, combined with short-term speculative players gunning for the 0.8500 barrier, saw AUD/USD surge to a fresh year-to-date high above 0.8530. NZD/USD was dragged higher, but heavy selling ahead of the rumoured 0.6900 option barrier limited the gains. The weekend G20 Finance Ministers meeting went largely as expected. The G20 agreed the global recession is bottoming out, but officials are still cautious about the outlook and the possibility of a "double dip" recession. As such, we're unlikely to see policy makers reverse their expansionary fiscal, monetary and financial measures any time soon. The G20's reassurance that the global stimulus measures will stay in place for a while yet should help underpin risk appetite. However, with the AUD/USD posting a new year-to-date high on Friday and NZD/USD having another failed attempt to break through 0.6900, we're mindful that AUD/USD and NZD/USD may struggle to make further gains in the immediate term. Locally, this week's key event will be the RBNZ's Monetary Policy Statement (MPS) on Thursday. We think there's been enough good news over the past six weeks to keep the RBNZ from cutting the OCR this week. However, with the stronger NZD doing more than its fair share of returning monetary conditions towards more neutral settings "“ we suspect the RBNZ will remain content to leave raising rates until mid next year. Current market pricing is considerably more hawkish than this. It's consistent with the first 25bps hike coming in March and about 100bps of tightening over the next 12 months. Our official view has the first OCR hike coming in June with a further 100bps of tightening over the remainder of calendar 2010. If this week's MPS brings markets around to our view of RBNZ policy, the associated drop in short-dated NZ interest rates and narrowing of NZ-US interest rate spreads would probably add some downside risks to NZD/USD. While the NZD/USD will continue to take its cues from global equities and risk appetite, local events will likely play a larger role this week. If NZD/USD manages to break above the rumoured 0.6900 option barrier early this week, we'd expect to see a spurt higher up towards 0.6950. However, ahead of the RBNZ decision on Thursday, we suspect the NZD/USD will struggle to maintain gains above 0.6900. The USD finished Friday night weaker against most of the major currencies, amid upbeat US payrolls data and solid gains on Wall Street. Friday night's US non-farm payrolls release added to the growing belief that, at least technically, the US recession is bottoming out. The US economy shed "just" 216,000 jobs in August (slightly better than the 230,000 forecast) "“ the smallest monthly decline in a year. Nonetheless, the unemployment rate rose to 9.7% - its highest level since June 1983. Stubbornly high unemployment will likely weigh on consumer sentiment and spending "“ meaning that while the US economy may start to grow again, the pace of growth will be tepid. Encouraged by the upbeat US payrolls report, and improved earnings outlooks for some technology companies, US stock markets chalked up solid gains. The S&P500 rose 1.3% on Friday (although it finished the week down 1.2%). There was a bit of volatility in currency markets in the immediate wake of US payrolls as investors struggled to decipher what it all meant. While EUR/USD initially dipped below 1.4200, the generally positive performance from US equity markets helped bolster risk appetite. Before long, EUR/USD rebounded from below 1.4200 to above 1.4300. The G20 Finance Ministers met at the weekend. There were no real surprises from the meeting. The IMF and G20 agree that the global recession is nearing an end. The IMF now forecasts the world to shrink just 1.3% in 2009, a shade less than its April forecast of -1.4%. Forecasts for 2010 have been revised up from 2.5% to 2.9%. However, G20 officials are still cautious about the global outlook and the risk of a "double dip" recession. As such, policy makers worldwide are in no hurry to unwind the massive fiscal, monetary and financial stimuli just yet. The appetite for risk and the significant rebound in equities from March has shown signs of exhaustion in recent sessions. Equities have failed to hold gains against a backdrop of generally positive economic data. Bond yields have fallen back in recognition of the benign inflation/low interest rate outlook ahead. Oil and other commodities have drifted lower and risky currencies "“ which broadly continue to follow equity markets "“ have shuffled sideways as investors ponder the sustainability of the economic recovery and the extent of equity gains. Recent equity rises have taken P/E ratios up to what look like fully-priced levels "“ the S&P 500 has reached highs not seen since 2004. In short, an equity market correction is widely seen as needed, with talk of a 5% to 10% slide commonplace. An environment of top-heavy stocks should be reasonably USD supportive and the USD has, in any case, recently shown signs of rising when US data surprises to the upside. However, with investors generally surprised by the extent of the rise in equities in recent months, and global data tending to be generally supportive, we suspect investors will be keen to sell USD on bounces. All up, we're expecting the USD Index to continue trading choppily within a 77.50-79.50 range over the coming weeks. We continue to think EUR/USD will struggle towards 1.4400-1.4450 and would view dips towards 1.4050 as a buying opportunity.