Opinion: Kiwi$ down as risk appetites wane on China slow down talk

By Mike Jones The NZD was double teamed last night by deteriorating investor risk appetite and a broadly stronger USD. From around 0.6950 this time yesterday, NZD/USD has slipped to around 0.6860. Appetite for ‘risk-sensitive’ currencies like the NZD began to come off the boil yesterday afternoon. A newspaper article quoting the Chinese central bank Deputy Governor as saying China will raise rates at an “appropriate time” spurred fears Chinese policy tightening could put the brakes on the roaring Chinese economy. Asian equities and commodity prices slipped in response, denting demand for global growth sensitive currencies like the NZD. The Nikkei fell 1%, and the Shanghai composite index slumped nearly 2.5%. The CRB index (a broad measure of global commodity prices) has fallen close to 1% over the past 24 hours. Having slipped below 0.6900 yesterday afternoon, the NZD/USD continued to dribble lower overnight. Appetite for risk remained in the doldrums as Moody’s downgrade of Deutsche Bank and a downbeat speech from the Fed’s Bullard raised concerns over the health of the global financial sector. US and European equity markets were flat to slightly down. Against a backdrop of lacklustre global equities and reduced risk appetite, investors trimmed positions in the NZD, AUD and EUR and returned to the relative ‘safe-haven’ of the USD. We believe today’s NZ Crown accounts, for the 7 months to January, will remain on course to deliver a core deficit of around 5% of GDP this year. We’re also expecting a mild bounce in today’s Q4 wholesale trade report. Still, in the absence of a major surprise from today’s data, we suspect the firmer USD will cap bounces in NZD/USD to around 0.6960 in the short-term. Support is expected around the 0.6800-0.6820 region. A convincing break through this level would open up a deeper correction towards 0.6720. The USD strengthened against all of the major currencies last night. Despite yesterday’s encouraging news on the Greek front, appetite for risk took a clear turn for the worse last night. Worries about a slowing in Chinese growth were highlighted by media reports quoting PBOC Deputy Governor as saying China will raise interest rates at the “appropriate time”. Asian stocks slumped 1-2.5% as a result. The negative sentiment continued into the offshore session, with US and European stocks either flat or down slightly. Not only did St Louis Fed President Bullard say a “substantial number” of bank failures are likely in 2010, but Moody’s downgraded Deutsche Bank to Aa3 from Aa1. While the downgrade really just brings Moody’s rating into line with the other ratings agencies, the news did nothing to help the sombre mood. US pending home sales data was hardly inspiring either, falling 7.6% in February compared to expectations for a 1% increase. The VIX index (a proxy for risk aversion based on the volatility of the S&P500) rose above 19%, from around 18.6% yesterday. With risk appetite on the back foot again, investors piled back into currencies regarded as a ‘safe-haven’ like the USD and JPY. Signs of further liquidity withdrawal in the US added support to the USD. The so-called GSEs (Freddie Mac and Fannie Mae) announced they had cut credit lines to 20 European banks, which was interpreted as a further step towards US policy tightening. Three month USD Libor rates also ticked above the Yen equivalent rates for the first time since August last year (0.251% vs. 0.252%), reducing the appeal of the USD as a carry trade ‘funding currency’. As expected, the ECB left rates on hold last night and signalled that it was beginning to unwind its special liquidity supporting measures. Still, the cautious approach of the ECB highlighted the fact European interest rates are likely to be left on hold for some time to come, adding weight to the already heavy EUR. Combined with the stronger USD, EUR/USD slipped to around 1.3560, from closer to 1.3700. There was likewise no move on interest rates or quantitative easing (QE) from the Bank of England last night. While the door is still open for the BoE to extend QE in future, the lack of any such announcement last night prompted a further paring of GBP short positions. GBP/USD briefly squeezed up to nearly 1.5120, before finishing the night closer to 1.5020. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here