Opinion: NZ dollar down after poor UK GDP and weak US confidence

By Danica Hampton The NZD/USD fell about 1 cent last night, from around 0.6550 to below 0.6450. Overnight, a sharp plunge in GBP/USD (after Q1 UK GDP was revised down to -2.4% from -1.9%) led the USD higher. The disappointing UK data was followed up by weak US consumer confidence and renewed concern about the global outlook saw equities and commodities dive. This encouraged investors to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD.

Despite some month-end and quarter-end demand for NZD, profit-taking from short-term speculative accounts and model-driven funds weighed on NZD/USD. Steady selling of NZD/AUD was also noted throughout the night, perhaps helped by a Terry McCrann article suggesting the RBA will leave rates unchanged when it meets next week. Yesterday's National Bank Business Survey showed a fraction of improvement, but the undertones remain discomforting. Net confidence crept up to +5.5 from May's +1.9, while the own activity expectations rose to +8.3 from last month's +3.8. While activity may have stopped falling, NZ firms still seem a long way from finding a genuinely solid footing. We are still mindful about the fragility of NZ's recovery. In particular, we're concerned the recent tightening in financial conditions (thanks to a higher NZD and rising interest rates) could derail the "green shoots". Tonight's online Fonterra auction and Thursday's ANZ commodity price data should provide further clues on how NZ export prices are faring. For today, the global backdrop should ensure bounces in NZD/USD are limited to 0.6480-0.6500. On the downside, initial support is seen ahead of 0.6420, but a break below this level will open up the downside towards 0.6350. The USD strengthened against all the major currencies last night as weak data raised concerns about the global outlook. Woeful UK GDP triggered a sharp plunge in GBP/USD. Q1 GDP was revised down from -1.9% to -2.4%, the largest quarterly decline since 1958. With interest rates already at exceptionally low levels, the Bank of England can't really apply much more monetary stimulus. However, the data supports our view that interest rates are unlikely to head higher until the middle of next year. GBP/USD plunged from around 1.6750 to below 1.6450 and this paved the way for a generally firmer USD. The disappointing UK data was followed by weaker than expected US data. Conference Board consumer confidence fell to 49.3 in June from May's downwardly revised 54.8. This was well below analyst forecasts for a rise to 55.0. The string of dour economic news renewed concern about the global outlook. Equity markets dropped, (the S&P500 is currently down 0.85%), commodity prices fell (the CRB index is down 1.7%) and investors rushed to the relative safety of the USD. Against a generally firmer USD, EUR/USD skidded from around 1.4150 to below 1.4000. The USD was also underpinned by real money flows thought to be related to month-end and quarter-end. Data from the IMF showing the USD's share of total reserves roes to 64.9% in Q1 2009, up from the 64% seen in Q4, probably also helped USD sentiment. There is a lot of economic data scheduled this week. The key release will be Thursday's US non-farm payrolls (US markets are closed on Friday for Independence Day), but next clues on the global outlook will come from Japan's Tankan survey (released 11:50am NZ time). The ECB meet on Thursday, although we're not expecting any change to the refinancing rate or any significant comments from Trichet. We suspect the USD will continue chopping around in familiar ranges over the next few weeks. Looking at the USD Index, a break below the early June lows of 78.00 is needed to suggest the downtrend has become entrenched. On the topside, a break above 82.50 is needed to suggest the uptrend is gaining traction. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.