Opinion: Kiwi to be hit by CPI, PMI data this week

By BNZ Currency Strategist Danica Hampton The NZD/USD rebounded a little on Friday night, as modest gains in global equities encouraged a bout of profit-taking ahead of the weekend. After last week's dramatic fall, from above 0.5900 to 0.5300, investors didn't need much of an excuse to take profits and position trimming saw the local currency squeezed above 0.5500 on Friday night. It may be a slow start to the week (thanks to the Martin Luther King Day holiday in the US), but there is plenty to watch for later in the week. The world will be paying close attention to Obama's inauguration speech; there is a flood of corporate earnings due out of US and plenty of data (including Chinese GDP and Germany's ZEW survey) to provide an update on the state of the global economy. While anticipation of a new US President has the potential to inject a little optimism into markets early this week, any rebound in investor confidence will likely be short-lived. We suspect ongoing concern about the banking sector and global recession fears will dominate markets again this week. As such, we expect growth sensitive currencies like NZD to struggle against the USD and JPY. This week's local data will add to the downside risks already facing the NZD. We expect Q4 CPI to fall on Tuesday (BNZ -0.1%q/q vs. market consensus of -0.4%q/q) taking the annual rate down to 3.8% (well down on Q3's 5.1%). November's retail sales (Wednesday) will likely plunge 2.2%m/m thanks to the fall in petrol prices and car sales. December's PMI survey (Thursday) will likely remain soft, in line with the global slump in demand for manufactured goods. For the coming week, we suspect the combination of a deteriorating global outlook and soft local data will mean bounces in NZD/USD are limited to 0.5600. On the downside, some support is expected around last week's low of 0.5280, but a re-test of November's sub-0.5200 low is looking increasingly likely in coming weeks. We saw some stabilisation in currency markets on Friday night as modest gains across global equities triggered profit-taking on long USD positions ahead of the weekend. EUR/USD rebounded from around 1.3150 to above 1.3300 and USD/JPY climbed from below 90.00 to nearly 91.00. Once again the spotlight was on the financial sector. Investor confidence was revived a little by news the US authorities were planning to inject US$20b into Bank of America. However, the capital infusion is clearly needed; Bank of America's quarterly earnings report showed the bank racked up its first quarterly loss in 17 years. Citigroup also reported a large loss and announced plans to split into two separate units. Over the weekend, the Sunday Times reports that the UK Treasury will drastically revise the terms of last year's bank bailout package and will guarantee at least GBP100b of new lending. There has also been growing speculation that the UK government plans to set up a "bad bank" to take toxic debt off bank's balance sheets in order to encourage new consumer lending. It will be a slow start to the week with US markets closed Monday for Martin Luther King Day. However, market participants along with the world will be watching President-elect Obama's inauguration on Tuesday. The swearing in of the new US President, combined with recent government actions to shore up the financial sector, may well inject a little optimism into financial markets early this week. However, we expect any optimism will prove to be short-lived. There is an avalanche of US corporate earnings reports scheduled this week and these are unlikely to inspire confidence about 2009. There is also a host of Chinese data due this week (including GDP, industrial production and retail sales), which should provide vital clues on the outlook for global growth and commodity prices. We suspect renewed fears about the global recession and concern about the health of the financial sector will underpin the USD and JPY again this week. After last week's ECB decision, where Trichet hinted the ECB would likely keep rates steady in February, investors will be paying close attention to the Eurozone data released this week. The key releases are Germany's ZEW survey, Eurozone industrial orders and the PMI. Signs that the Eurozone is deteriorating at a rapid rate will likely see investors question the ECB's hawkish resolve and this could take a toll on EUR/USD. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.