Opinion: Kiwi holds its ground against US$, but downward pressure remains

By Danica Hampton The NZD/USD nudged higher on Friday night, helped along by positive US equities, firmer commodity prices and solid demand from model accounts. Despite last week's OCR Review "“ where the RBNZ cut rates 50bps and said that rates would remain low until the latter part of 2010 "“ the NZD/USD finished the week around 0.5700 very close to the levels seen before Thursday's decision. So what's in store over the coming week? Recent global data has tended to suggest the pace of the global contraction is easing, but scepticism over the resilience of the "˜green shoots' and equity markets' ability to hold on to gains remains. With US non-farm payrolls and the US bank stress testing results due later this week, further USD range trading looks likely again this week. Locally, the upcoming data is unlikely to inspire much confidence in the NZ economy. Today's QES wage data should show early signs of deceleration and the filled-jobs series will likely be consistent with further job losses. However, it's Thursday's Q1 Household Labour Force Survey that will be the key event. Everyone, including ourselves, expects a clear jump in the jobless rate - to 5.3% from Q4's 4.7% (with a quarterly employment decline of about 1.0%). It's also worth noting, the recent NZD/USD strength looks out of line with the recent narrowing of NZ-US interest rate spreads (NZ-US 3-year swap spreads have narrowed about 70bps to 1.98% over the past month), which suggests there isn't a compelling fundamental reason to chase the NZD/USD significantly higher from here. While the major currencies are expected to tread water within familiar ranges, this week's NZ data should help keep the downward pressure on NZD/USD. Over the coming week, we suspect NZD/USD will struggle to break above 0.5750-0.5780. Initial support is seen in the 0.5600-0.5620 region, but a break below this level will suggest a deeper correction back towards 0.5500-0.5550 is on the cards. The USD held steady against most of the major currencies on Friday night. US equities rose modestly, but with much of Europe closed for the May Day holiday there wasn't much to write home about for currencies. EUR/USD spent most of Friday night between 1.3220-1.3320, while USD/JPY ranged between 99.00-99.60. US equities eked out modest gains as investors digested a mix of US economic news and braced themselves for the results of stress testing on the US banking system (results due May 7). On balance, the US data tended to beat expectations. The manufacturing ISM rose to 40.1 in April, well above forecasts of 38.4 (although still below the 5- threshold that signals contraction). The University of Michigan consumer sentiment index was finalised at 65.1 for April (above forecasts of 61.9), but factory orders fell 0.9% in March (vs. -0.6%m/m forecast). While the economic news was relatively upbeat, worries about the results of the "stress testing" results took a toll on financial stocks. Stocks like Bank of America and Citigroup fell about 2.6%, while General Motors and Ford slipped about 5%. The S&P500 rose 0.54% on Friday and finished the week up 1.3%. In general, the global economic data is tending to suggest the pace of contraction is easing, but scepticism on this and on equity markets' ability to hold on to recent gains remains. With the results from the US bank stress tests and US payrolls data due at the end of this week, we expect the major currencies to continue to trade choppily within familiar ranges this week. Bear in mind, UK markets are closed on Monday and Japanese markets are closed Monday through Wednesday. One of the big events of the week will be the ECB rate decision and press conference, where President Trichet will formerly lay out non-conventional easing measures. We expect the ECB to cut the refi rate 25bps to 1% and hint that this will be the base for now. A 25bp cut will narrow the corridor between refi and deposit rates to 75bps "“ a level the ECB does not want to cut further at this stage for fear of it negatively impacting on banks' willingness to lend. We expect the ECB will extend the maturity of its liquidity measures (from its current 6 months to 9 or 12 months) and announce that it's prepared to buy corporate paper or commercial loans. However, we do not expect an announcement to buy government debt at this stage. On balance, we suspect bounces in EUR/USD to be limited to 1.3400, but dips towards 1.3100 will likely attract demand. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.