Opinion: NZ$ rises after Fannie/Freddie bailout

By BNZ Currency Strategist Danica Hampton The NZD/USD slid sharply last week, pressured by fears about the health of the global economy. Over the past few weeks, growing conviction that growth around the world is slowing at least as sharply as that in the US has underpinned the USD. Meanwhile, heavy losses across global equities and escalating risk aversion prompted selling of growth sensitive currencies like NZD against "˜safe-haven' currencies like JPY. NZD/JPY fell from above 75.00 at the start of last week to below 70.00 on Friday. The combination of a firmer USD, and heavy NZD/JPY supply, dragged NZD/USD below 0.6600 "“ its lowest level since November 2006. Friday night's US non-farm payrolls report did little to dispel worries about the health of the global economy. Payrolls fell 84,000 in August, slightly worse than the 75,000 forecast, and the unemployment rate jumped to 6.1% well above the 5.7% seen in July. While the knee-jerk reaction was to sell USD, this soon gave way to JPY cross selling and NZD/USD bounced around within a 0.6620-0.6720 range. The bigger news came late Friday night (and over the weekend), as the US Treasury said they would take control of troubled mortgage agencies Freddie Mac and Fannie Mae. In currency markets, the news was seen as supportive for the US financial sector and this triggered a widespread buying back of short JPY cross positions. USD/JPY jumped from 107.50 to nearly 109.00, and strong demand for NZD/JPY has lifted NZD/USD from below 0.6700 to above 0.6750 this morning. Given the extreme moves seen over the past week, we continue to think the NZD/USD is looking overdue a bit of consolidation. A busy week lies ahead in NZ, with the RBNZ's September Monetary Policy Statement taking centre stage. With everyone expecting a 25bp cut on Thursday, most interest will likely focus on the accompanying macroeconomic and financial forecasts. While the Reserve Bank may not go quite so far as to justify the 6.50% OCR presently built into wholesale rates, the implication of the accompanying statement will likely be close enough to not cause too much of a stir. Overall, we look for the NZD/USD to consolidate this week. Initial support is seen around the 0.6635-0.6640 region and it will take a break below last week's low of 0.6590 to suggest the downtrend is gaining traction again. On the topside, expect the currency to face headwinds towards 0.6880-0.6900. Majors Worries about a global slow-down dominated currency markets last week. Growing conviction that growth elsewhere in the world is slowing at least as sharply as that in the US underpinned the USD. While escalating concern about the global growth outlook took a heavy toll on commodity prices, global equities and risk appetite, which encouraged widespread selling of JPY crosses. Against a backdrop of a generally firmer USD, heavy EUR/JPY supply saw EUR/USD sink from above 1.4650 to 1.4200 last week. Similarly, heavy selling of JPY crosses saw USD/JPY drop from above 109.00 to 105.50 last week. Friday night's US non-farm payrolls report did little to dispel worries about the health of the global economy. Payrolls fell 84,000 in August, slightly worse than the 75,000 forecast, and the unemployment rate jumped to 6.1% well above the 5.7% seen in July. While the knee-jerk reaction was to sell USD, which saw EUR/USD bounce from 1.4200 to nearly 1.4350, this soon gave way to JPY cross selling and EUR/JPY supply knocked EUR/USD back below 1.4250. The US Treasury seized control of troubled mortgage agencies Fannie Mae and Freddie Mac. It announced a four-part rescue plan that includes an open-ended guarantee to provide as much capital as required to prevent the agencies from falling into receivership. Fannie and Freddie have each agreed to issue US$1b of senior preferred stock to the US Treasury (paying an annual interest rate of at least 10%). The Treasury is also creating a "Secured Lending Credit Facility" as a back-up source of funding in case the agencies cannot borrow enough money on the open market. In currency markets, the Freddie Mac and Fannie Mae news was seen as supportive for the US financial sector and this triggered a widespread buying back of short JPY cross positions. USD/JPY jumped from 107.50 to nearly 109.00 and strong demand for EUR/JPY saw EUR/USD rebound from below 1.4250 to nearly 1.4340 this morning. With investors worried about the health of the global economy, currency markets will likely take their cues from equity and commodity markets again this week. Key US data this week including Pending Home Sales (Tuesday) and retail sales (Friday). It will be a fairly quiet week for data in Europe with the key event being the release of Eurozone Industrial Production, which is likely to reinforce the view that growth in the Eurozone is spluttering. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.