Opinion: NZ$ rises despite Bollard highlighting fragility of 'green shoots'

By Danica Hampton It's been a bit of a wild night in currency markets. Sharp changes in USD sentiment saw NZD/USD trade choppily within a 0.6200-0.6400 range. The first half of the night was all about USD strength. Rumours of weak UK employment data (and chatter about a large sell order) saw GBP/USD drop sharply and this paved the way for a generalised bout of USD buying. A slide in European equities (most indices fell 1.5-2%) also encouraged short-term speculative accounts to sell growth sensitive currencies like NZD, in favour of the "˜safe-haven' USD and JPY. The net result saw NZD/USD slip from above 0.6300 to nearly 0.6240. But the NZD/USD weakness didn't last. Once it was eventually released, the UK employment data wasn't nearly as bad as feared and this helped GBP/USD rebound from its lows. Then, softer than expected US CPI data triggered a sharp USD reversal. Headline CPI dropped 1.3%y/y in May (vs. -0.9% forecast), which convinced investors the Fed was unlikely to start raising interest rates any time soon and this prompted a broad based sell-off in the USD. Against a generally weaker USD, NZD/USD was dragged back up towards 0.6350. It's worth noting, comments made by Governor Bollard in a speech published yesterday. Bollard highlighted the fragility of NZ's "green shoots" and threat posed to the NZ recovery from the recent tightening of financial conditions (a message the RBNZ may not have delivered strongly enough in its  June MPS). Overall, it seems the RBNZ wants to remind everyone of the still present downside risks "“ a judicious dampener for both NZ rates and the NZD. For today, we expect NZD/USD to continue trading choppily within familiar ranges. We expect bounces towards 0.6350-0.6360 to attract sellers, while initial support is seen ahead of 0.6240-0.6250. It was an extremely whippy night in currency markets. The USD started on a firmer footing, but sharply reversed its gains after softer than expected US CPI data. The move higher in the USD early in the night was led by GBP/USD weakness. Rumours of weak UK employment data and talk of a large sell order (reportedly 500m) did the rounds. GBP/USD fell from nearly 1.6500 to around 1.6250. However, the UK employment report wasn't quite as bad as feared once it was actually released. Jobless claims rose 39,000 in May (vs. 60,000 forecast) and the ILO unemployment rate fell from 7.3% to 7.2% in April. As a result, GBP/USD rebounded off its lows and climbed back up towards 1.6400. US CPI data also aided the sharp reversal in USD fortunes. Headline CPI dropped 1.3%y/y in May, well below forecasts for 0.9% fall. Not only did the unexpectedly large drop reignite fears about deflation, but it convinced market participants the Fed was unlikely to start raising interest rates any time soon. As a result,US interest rates fell (2-year government bond yields fell 5bps to 1.15%), the yield curve steepened a little and the USD was sold across a broad range of currencies. EUR/USD spent the night trading choppily within a 1.3800-1.4000 range. Steady EUR/JPY supply helped weigh on EUR/USD early in the session. Short-term speculative players were noted sellers of EUR/JPY (probably encouraged by the 1.5-2% drop in European equities) and talk of Eurozone bond redemptions and coupon repatriation also took a toll on EUR. Nonetheless, EUR/USD reportedly ran into strong Asian demand ahead of 1.3800. Indeed, there is a lot of talk about a large 1.3800-1.4000 option structure and this range looks likely to contain the currency near-term. It's been a mixed night for equity markets. While European markets closed lower, Wall Street chalked up modest gains encouraged by the softer than expected CPI data. Investors have been concerned that rising prices would threaten a recovery by curbing demand. News on the financial sector was also mixed. Ratings agency Standard & Poor's cut ratings and revised outlooks on 22 US banks, citing its concern about further weakening in the financial sector. But many banks (including JP Morgan, Morgan Stanley and Goldman Sachs) announced that TARP funds borrowed from the government during the height of the financial crisis has been repaid. The S&P500 is currently up 0.2%. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.