Opinion: Worries about 'sad state' NZ economy means Kiwi will remain weak against Aussie

By Danica Hampton The NZD/USD has nudged higher over the past 24 hours, bolstered by strong gains in global equities and improving global sentiment. Last night's upbeat data helped bolster hopes about a global recovery. Not only were these signs of improvement in the US housing statistics (pending home sales rose 3.2% and construction spending increased for the first time in six months), but data from China and India suggests the manufacturing sectors in these economies are expanding again. Optimism on the global growth outlook and strong gains in financial stocks (as investors hope the Fed's stress tests will show that banks are in better shape than anticipated) saw global equities surge. European equities rose 2-3% and the S&P500 is currently up 3.3%. The improving global outlook and strong gains across equities triggered a bout of USD weakness as investors trimmed back "˜safe-haven' positions. Against a generally weaker USD, NZD/USD climbed from just above 0.5700 to around 0.5770. However, worries about the sad state of the NZ economy (and expectations the Thursday's Household Labour Force Survey will see the unemployment rate rise to 5.3% from Q4's 4.7%) saw the NZD under perform against the crosses, particularly NZD/AUD and NZD/EUR. The key event today will be the RBA meeting (due 4:30pm NZ time). On balance, most economists are looking for rates to be left unchanged at 3.00%. Regardless of the outcome of this meeting, weakness in the Australian economy will likely see the RBA cut rates further in coming months and our forecasts have the cash rate at 2.00% by year-end. For today, worries about the NZ economy should keep the NZD weak against the crosses and ensure bounces towards 0.5780-0.5800 in NZD/USD attract sellers. However, the global backdrop of recovering risk appetite, firm equities and a generally weak USD will likely keep NZD/USD underpinned on dips towards 0.5700. The USD weakened against all the major currencies last night as US equities posted strong gains and hopes about a global recovery reduced "˜safe haven' demand. EUR/USD dipped below 1.3250 early in the evening following comments from the ECB's Weber, who said the Eurozone was unlikely to start growing again until the second half of 2010. However, reduced "˜safe-haven' demand for USD amid a strong surge in global equities saw EUR/USD surge from below 1.3250 to above 1.3400. However, traded volumes were light with the UK and Japan closed for holidays. Investors were cheered by relatively upbeat economic data. In the US, pending home sales jumped 3.2% (well above the flat result forecast) and construction spending rose 0.3%m/m in March "“ the first monthly increase since September. A slew of manufacturing data was also released. The Eurozone PMI rose to 36.8 in April (slightly better than 36.7 forecast). China's CLSA PMI rose to 50.1 and India's PMI rose to 53.3 in April. While manufacturing activity in the Eurozone is still contracting, the expansion seen in China and India has helped support the idea that the global economy is on the road to recovery. European equities rose about 2-3% and the S&P500 is currently up 2.7%. Financial stocks also rocketed higher as investors hoped the Fed's stress tests would show the financial sector was in better shape than anticipated. Shares in Bank of America rose 5% and Wells Fargo shares rose about 9%. President Obama and US Treasury Secretary Geithner also announced a proposed overhaul of the tax system, which is expected to close loop holes in the treatment of overseas operations and tax havens. This US Administration estimates such measures could help raise up to US$210b in revenue over the next 10 years. With US 10-year government bond yields above 3.15%, well above the levels seen prior to the Fed's quantitative easing announcement in March, investors were eagerly awaiting the Fed's third bond buy-back operation. The Fed bought US$8.5b worth of US Treasuries last night, which was the largest buy-back to date (the first was US$7.5b and the second was US$7.0b). While the Fed has previously avoided the 10-year issue, it did purchase US$1b of 10-year notes last night. Despite the Fed's purchases, US bond yields nudged a little higher thanks to reduced "˜safe-haven' demand and the strong surge in US equities. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.