Opinion: NZ$ performs strongly overnight following better-than-expected US data

By Mike Jones The NZD has been one of the strongest performing currencies overnight, following a sharp weakening in the US dollar late in the offshore session. Growth sensitive currencies such as NZD were initially under pressure overnight following weakness across most Asian stock markets yesterday. In particular, the Shanghai index (which is becoming a key gauge of investor sentiment) fell close to 1% following comments from Chinese officials about limiting overcapacity. As concerns over the strength of the Asian economic outlook escalated, the NZD was briefly knocked below 0.6800. However, risk appetite soon returned following stronger-than-expected US economic data. The second estimate of US June quarter GDP was not quite as bad as markets had feared (-1% vs. -1.5% expected), and jobless claims fell back to around 570 000. While still poor in a levels sense, the stronger US data helped ease fears about the global outlook. As risk appetite returned, investors ditched the safe-haven appeal of the USD for growth sensitive currencies like NZD. Heavy EUR buying out of Asia and a late rally in US stock markets then paved the way for a further sharp bout of USD weakness late in the offshore session. This, combined with strong real money demand for NZD and AUD saw the NZD once again catapulted to levels around 0.6900. Looking back over the past week, the NZD has traded in a relatively tight range as market sentiment has continued to wax and wane. While the global backdrop certainly seems to be improving, markets are now wary of getting overly excited. Despite repeated NZD attempts to breach 0.6900, resistance around this level appears to be holding firm for now. As such, we think the NZD will continue to trade in a narrow 0.6790 "“ 0.6900 range for today. A couple of pieces of second-tier data are due for release today. Our economists are anticipating a bounce of around 10% in July residential building consents, but with counteracting weakness in core non-residential consents. July's credit aggregates, also to be released today, are expected to re-establish a moderately improving trend. USD weakness spurred gains in most of the major currencies overnight. Yesterday's weakness in Asian stocks (in part due to Chinese officials' comments about limiting overcapacity) initially raised concerns about the strength of the Asian economic outlook. The Shanghai index fell 0.7%, the Nikkei declined 1.6%, while the Hang Seng index was off close to 1%. These fears tempered investors' risk appetite, providing a boost to "safe-haven" currencies like the USD and JPY. USD/JPY fell to around 93.70, the lowest level in around a month. However, stronger-than-expected data out of the US helped ease fears about the global outlook. According to the second estimate of US second quarter GDP, US economic activity fell by 1% (annualised) in June, better than the -1.5% analysts had feared. Moreover, analysts noted the large drop in US inventories may pave the way for a return to growth over the second half of the year. US jobless claims fell to 570 000, broadly as expected. And Fed president Lacker said "the economy appears to have levelled out and"¦we can look forward to better times ahead". All of this tended to support risk appetite, which saw the USD weaken as "safe-haven" positions were wound back. A late rally in US stocks and rumours a large investment bank was unwinding a large US dollar long position added further downward pressure to the USD, which plunged late in the offshore session. The S&P 500 is currently up around 0.3%, having fallen as much as 1% early in the night. These developments saw all of the major currencies post gains against the US dollar overnight. The AUD was one of the strongest performers, rebounding over 1 cent to pop back above 0.8400, from close to 0.8270 the day before. Yesterday's Australian capex data was much stronger-than-expected (+3.3% vs. -5% expected) which helped underpin AUD. Strong EUR buying from Asian central banks and sovereign names saw EUR rapidly squeezed up to around 1.4350. Meanwhile, GBP again underperformed the rest of the majors. UK business investment declined 18% y/y in Q2, underscoring fears that optimism about the UK recovery may be misplaced. For today, we wouldn't be surprised to see the USD stage a modest rebound after the sharp sell off overnight. This may limit further near-term gains in the major currencies. Nevertheless, with markets still optimistic about the global economic recovery and risk appetite firm, we think the USD index will struggle above 78.8 in the short-term. * All of the research produced by the BNZ Capital team of economists is available here.