Opinion: NZD falls despite USD weakness

By Danica Hampton The key theme in broader currency markets last night was USD weakness. Improving global sentiment (thanks to upbeat manufacturing data in the US, Europe and China) and China calling for the G8 to discuss alternative reserve currencies saw the USD weaken against most currencies. (Milk price corrected in 4th paragraph) However, the NZD/USD bucked the trend "“ it fell from above 0.6470 to below 0.6390. Despite the generalised USD weakness and improving global outlook, short-term speculative players found plenty of excuses to sell NZD (and NZD crosses) last night. Overnight, there was a lot of focus on the whopping NZ$4.6b worth of Eurokiwi and Uridashi bonds maturing this month. And fears these retail investors will switch out of NZD denominated assets has weighed on the NZD. There's also been some mention of a survey run by a Swiss bank that shows that 44% of its clients think the RBNZ will be the next central bank to intervene in the currency. Fonterra's online dairy price auction was also weak. The average price of whole milk powder fell 3% over the past month to US$1,841 US$1,829 down about 58% from this time last year. It's interesting to note, milk powder prices have continued to trend lower in 2009 (they're down 11% so far for 2009), which contrasts the stable-to-firm trend we're seeing in many other commodity prices. For example, the CRB index (a broad measure of commodities) is up 7% year-to-date and 25% above its March lows. Watch the ANZ commodity price release (due at 3:00pm today) for further insight on the outlook for NZ export prices. Today, concern about the fragility of NZ's recovery and July's impending Eurokiwi and Uridashi maturities should help limit NZD/USD bounces towards 0.6470-0.6480. Solid support is expected around the June 25 low of 0.6350. Overseas, the USD weakened against most major currencies last night. EUR/USD rose from around 1.4050 to 1.4200 and GBP/USD climbed from sub-1.6400 to nearly 1.6550. News that China has asked to debate proposals for a new global reserve currency at next week's G8 summit triggered a wave of USD selling last night. Over recent months officials from countries like China and Russia have suggested there should be less reliance on the USD as the primary reserve currency. However, the proposals have failed to gain traction. Several world leaders, and officials from the IMF, have continually reaffirmed the USD's status as the primary reserve currency. Upbeat manufacturing data helped boost optimism about the global recovery. The US manufacturing ISM rose to 44.8 in June, suggesting that the manufacturing sector is now contracting at a slower pace than in May. Similar surveys in Europe also showed manufacturing contracting at a slower pace. Eurozone PMI rose to 42.6 in June up from May's 42.4 and the UK manufacturing PMI rose to 47.0 up from May's 45.4. China's PMI rose to 53.2 in June (up from 53.1 in May) consistent with modest growth in the manufacturing sector. Improving economic optimism and solid gains in resource stocks helped lift global equity markets. European indices rose about 2% and the S&P500 is currently up 1%. Improving global sentiment and reduced "˜safe-haven' demand added to the weight on the USD. Investors are now bracing themselves for tonight's US non-farm payrolls release. Last night's ADP employment figures estimate that 473,000 jobs were lost in June. This suggests some downside risks to the consensus pick of -365,000 for tonight's payrolls. A disappointing payrolls result will help reinforce last week's Fed message, that rates aren't going up for a long while yet. Any downward pressure on 2-year yields will likely result in a steeper US yield curve and a generally weaker USD. We suspect the USD will continue chopping around in familiar ranges over the next few weeks. We'll need to see the USD Index break out of its recent 78.00-82.50 range to convince us a new trend is starting. The ECB also meet tonight, but we're not expecting any change to the refinancing rate or any significant comments from President Trichet. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available