Opinion: Fitch effect fleeting as Kiwi$ firms back towards 65 USc

By Danica Hampton Late yesterday, Fitch affirmed New Zealand's AA+ rating, however, they revised our outlook from Stable to Negative. Fitch chose to highlight the usual factors of external debt rising, the current account deficit and a weak medium-term outlook for growth. Fitch's move surprised the market, especially since the comparably positive reaction to the May Budget from Standard & Poor's and Moody's. Recall that, following the Budget, Standard & Poor's upgraded the NZ outlook to stable from negative, while Moody's confirmed a stable outlook on NZ's Aaa sovereign credit rating. The breaking news immediately undermined the NZD, seeing it lose close to a cent against the USD in frenetic trading. Overnight the NZD has predictably underperformed on cross rates, steadying against the beleaguered greenback at the 0.6450 level, but easing back to 60.5 on a TWI basis from yesterdays levels above 61.0 Our economist"˜s feel that the Fitch announcement is a reminder of some of the broad imbalances that could remain in the economy. The risk is very real that if we do get some growth emerging in the next year or two, the composition might be all round the wrong way, and this is where the currency is quite a big issue. If you believe that global news is going to get better, then in all likelihood the currency is going to keep edging up. It would be seen in over-valued territory. This would mean that we essentially shut our export sector out of any recovery and instead will rely on domestic demand, consumers and housing to fill the gap. That's all the wrong way round and along the lines of commentary from both the RBNZ and elected officials in recent days. Certainly away from the local focus there continues to be a global focus on good news, the hackneyed phrase about green shoots remains relevant following ongoing strong earnings reports overnight and the release of stronger than expected Chinese Q2 GDP yesterday. It was of course a busy day locally, with data releases in the morning. It was oft said that it would take a recession in order for inflation to be contained. At long last, annual CPI inflation has fallen to the mid point of the central bank's target band. Moreover, even lower inflation can be expected with little chance of an attack on the top end of the band for several years. Recession has created the desired inflation outcome and the medium term threat to bottom end of the RBNZ target band grows, the currency track will be the key and Interest rates are likely to be lower for longer than the market is pricing. Earlier in the morning the seasonally adjusted PMI for June printed at 46.2. This was up 3.1 points from May, and 1.2 points higher than June 2008. The last time activity was higher than June 2009 was September 2008 (46.5). We are encouraged that the new orders sub-index had made it into expansion territory as this suggests there are increasing signs the sector is beginning to see some light at the end of the tunnel. Of course, it's still a long, dark tunnel. But the big jump in the new orders index gives hope of some locomotion in activity before too much longer. So as we round out the week we again contemplate the importance of the 0.6525/0.6550 window of resistance which is trendline resistance ahead of early June highs towards US 66 cents. Immediate support is a moving target, but on the day should be seen ahead of the 0.6400/0.6425 level. Majors Overnight the markets have danced to a familiar tune, equity markets upbeat on various earnings reports and helped in their mood by yesterday's Chinese data. US data, in the form of better than forecast Initial Jobless Claims countered a weaker Philly Fed Survey, and so allowed markets to continue with a positive disposition to risk appetite which has meant a continuation of broad currency strength against the USD. The week ends with a notably bare cupboard of expected releases, Australian trade price data followed by trade data from Europe and US Housing starts updates tonight. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.