Opinion: No clear direction for Kiwi as global news both good and bad

By Danica Hampton NZD/USD has spent the past 24 hours consolidating within a 0.5080-0.5140 range. A mix of NZ news was released yesterday, none of which inspired much confidence in the outlook for the NZ economy. The National Bank Business Outlook showed that business profitability is being eroded as the recession deepens resulting in substantial cuts in investment and an increasing number of layoffs. While the RBNZ credit numbers showed that household credit growth remains sluggish; rising 0.1% in January bringing the annual rate to -3.6%y/y. We continue to think the NZ unemployment rate is heading up to at least 7%, which in turn will threaten consumer confidence and household spending going forward. In contrast, yesterday's Australian capital expenditure data printed well above expectations in Q4 (+6.0%q/q vs. -3.0% forecast), which coming on the back of positive surprises in construction and retail activity for the quarter suggests Australian Q4 GDP will probably avoid a negative print. The contrasting NZ and Australian data has encouraged investors to sell NZD against AUD. NZD/AUD has slipped from around 0.7950 to nearly 0.7800 this week and steady NZD/AUD supply has helped limit the topside in NZD/USD. Last night's global news didn't provide any clear direction for the NZD/USD. A wave of woeful data out of the US and Eurozone reinforced concerns about the global growth outlook for 2009. However, equity markets were bolstered by firmer financial stocks (after the UK released details of a revamped bank support plan and news that Obama's new budget includes provisions for US$750b worth of additional support for the financial sector). For today, initial headwinds are expected around 0.5150, but the currency has the potential to be squeezed up towards 0.5180-0.5200 should we see a further rebound in global equities and position trimming ahead of the weekend. On the downside, support is seen ahead of 0.5050-0.5060. Currencies spent the night consolidating within familiar ranges as investors digested the latest mix of news. Equities worldwide were bolstered by firmer financial stocks, but the economic data continues to paint a gloomy picture for global growth in 2009. EUR/USD spent most of the night within a 1.2680-1.2800 range, GBP/USD traded choppily between 1.4150-1.4400 and USD/JPY climbed from 97.50 to above 98.50. Financial stocks across Europe were boosted by a revamped UK bank support plan (which includes a larger than expected insurance pool of £550b) and an earnings report from RBS that wasn't quite as bad as expected. News that Obama's new budget will include provisions to buy an additional US$750b of financial sector assets saw the rebound in financial stocks continue through the US session. The FTSE rose 1.7%, the DAX rose 2.5% and the S&P500 is currently up 0.5%. Meantime, the economic news from around the world was woeful. The EU Commission surveys showed that confidence in the industrial, service and consumer sectors have all fallen to record lows. The business climate indicator fell from -3.03 to a new record low of -3.51, while the economic sentiment index fell from 67.2 to 65.4. The data is consistent with Eurozone Q1 GDP contracting at a sharper pace than the -1.5% seen in Q4. Given the slow-down in activity, we see nothing to stop the ECB from cutting rates by 50bps next week, taking them to a record low of 1.50%. In the US, the updates on homes sales, manufacturing and unemployment offered another snapshot of the deepening economic slow-down. New homes sales fell 10.2% in January to an annual rate of 309,000 "“ the worst result on record. Durable goods orders fell 5.2% in January (well below -2.5% forecast), the sixth consecutive monthly decline. Initial jobless claims rose 667,000 in the week ending February 22 and continuing claims (i.e. the number of Americans on jobless benefits) grew to 5.1m "“ a new record high. Investors are still very worried about the global outlook and we suspect the USD will remain the "safe-haven" currency of choice in coming weeks. We expect EUR/USD will struggle above 1.3000 and look for a move back towards 1.2500. Increasing concern about the Japanese economy has weighed on JPY over recent days. While USD/JPY may push a little higher near-term, we are mindful that repatriation flows ahead of fiscal year-end (31 March) will likely provide some support to JPY. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.