Opinion: Kiwi takes a breather as world watches Congress

By BNZ Currency Strategist Danica Hampton The NZD/USD steadied last night, as the market takes a well earned breather while it watches developments on Capitol Hill to decide on what next for the USD and risk aversion remains elevated curbing enthusiasm for the carry trades like NZD/JPY. The NZD/USD has through the night traded on a 68cent handle, and will open this morning at the 0.6860 level after an overnight session of reduced interest and volume where only the hardiest and addicted were compelled to be involved. On Capitol Hill Fed Reserve Chairman Bernanke addressed the congressional Joint Economic Committee on the "grave threat to financial stability" against a backdrop of softer housing data on an otherwise quiet data day in the US. Yesterday's WMM Index of Consumer Confidence surged to 104.8 in September from June's awful 81.7. While factors such as falling petrol prices, reduced mortgage rates and the fast approaching 1 October tax cuts are no doubt playing a role, we get the deeper feeling it's more of a relief bounce than anything strong or sustainable. Even with its big bounce, it's still sub-par though it can't be ignored and suggests the worst of the spending collapse is probably behind us for now. Fed Chairman Bernanke and Treasury Secretary Paulson continue to push the bailout plan to Senators who have so far baulked at simply rubber stamping the plan, both sides of the House yet to be sold on the detail. Equity markets are trading sideways, though there was some heart taken from yesterday's news that Warren Buffett will be investing some US$5bln in Goldman Sachs. Against a backdrop of slowing global growth and fragile risk appetite, we suspect bounces in the NZD/USD will continue to be limited, the 0.6875-0.6900 region as an initial focus while support is still seen around 0.6750-0.6775 and a break below this level will open up the downside towards 0.6700. Friday's Q2 GDP still stands out on the calendar like a beacon and we believe it will confirm a technical recession with an outcome of -0.4/-0.5% which is broadly in line with the market. If the data prints as expected then attention will quickly shift to prospects for Q3 growth which at this early stage we feel is possibly another sub-zero reading. It's on this basis that we continue to highlight the chances of the RBNZ front-loading a further portion of their easing, starting with 50 basis points to 7.00% at the 23 October OCR review. The USD held steady against most of the major currencies last night. While the USD is still far from out of the woods (as concern about how the US Treasury will fund its bail-out package still lingers), traders took the opportunity to enjoy a quieter, less dramatic day thus far. EUR/USD will open this morning at the 1.4650 level, somewhat impacted by a weak German IFO last night (actual 92.9 previous 94.8), further ammunition for analysts who feel that activity in the Euro zone's largest economy is slowing. US stock markets are subdued waiting for further commentary from Bernanke and Paulson as they explained the details of the proposed bailout package to the Joint Economic Committee. While the senators said they were prepared to take action, they appear far from ready to give the dynamic duo everything they want without due consideration. While the bailout plan will likely stave off a breakdown of the financial system (if approved), it is unlikely to materially bolster the US economy or prevent a recession in the Eurozone and the UK. While the financing of the bailout package raises some questions about the US fiscal deficit, we suspect the USD will also remain well supported against a backdrop of slowing global growth. At 9:00pm EST (NZ 1pm) President Bush will address the nation on the Bailout Plan. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.