Opinion: Weak US$ supports Kiwi dollar for now

By BNZ Currency Strategist Danica Hampton The NZD/USD has spent the past 24 hours consolidating within a 0.7040-0.7160 range. While yesterday’s PPI data looked highly inflationary (Q2 output prices rose 3.5% and input prices climbed 5.6%), it didn’t materially change our macro view of the NZ economy and the data was effectively shrugged off by market participants. Instead, steady NZD selling was noted from a variety of leverage funds and model-driven accounts, which combined with some real-money supply out of Asia, saw NZD/USD fall steadily through yesterday afternoon. Overnight, the NZD/USD was underpinned by a generally weaker USD. Concerns about the health of financial sector continue to plague equity markets and the S&P500 fell about 1%. Elevated US PPI and dire housing market data had investors whispering about the possibility of US ‘stagflation’ and crude oil rebounded a little (up nearly $2 to US$114.80/barrel). The mish-mash of news resulted in a generally weaker USD. EUR/USD surged from below 1.4650 to nearly 1.4800 and the NZD/USD was dragged along for the ride. Looking ahead, we still think the RBNZ is on track to cut interest rates 25bps to 7.75% in September, which combined a sharp slow-down in NZ growth and a generally firmer USD should see the NZD/USD trend lower over coming months. However, given the speed and magnitude of the currency’s descent over the past month, we think the NZD/USD is overdue a period of consolidation. For today, expect NZD/USD to take its cues from changes in USD sentiment. Should the USD weakness continue, and EUR/USD break above 1.4800, this may give NZD/USD enough impetus to break through resistance at 0.7160 and extend its gains towards 0.7200. On the downside, expect the currency to find support on dips towards 0.7035. The USD slipped against most of the major currencies last night, pressured by concern about the financial sector and lacklustre US data. EUR/USD climbed from below 1.4650 to just shy of 1.4800 and USD/JPY sank from above 110.30 to below 109.60. Global stock markets continued to tumble last night. Concern the US Treasury may recapitalise US mortgage agencies Fannie Mae and Freddie Mac continues to plague financial stocks. And analysts warned that Lehmans may have to write-down another US$4b in Q3.The German DAX index fell 2.3%, the UK FTSE fell 2.4% and the S&P500 is currently down about 1%. In the US, last night’s data suggests the housing market is still in a dire state. Housing starts fell 11%m/m to 965,000 and building permits fell 17.7%m/m to 937,000. But rising price pressures mean it will be increasingly difficult for the Fed to keep interest rates low. US wholesale prices, as measured by PPI, climbed 9.8%y/y in July – the fastest annual pace in 27 years. Core PPI (excluding food and energy) also grew 3.5%y/y for the month (vs. 3.2% forecasts). Richmond Fed President Jeffrey Lacker said the US is still in a “risky situation” on the inflation front and with interest rates awfully low the Fed needs to withdraw monetary stimulus in a timely way. But Lacker’s hawkish view is clearly not shared by the market. The chances of the Fed hiking 25bps to 2.25% by year-end have been scaled back to around 19%, from closer to 45% a month ago. Across the Atlantic, news out of the Eurozone was a little mixed. The headline measure of the German ZEW Business Survey came in a little stronger than expected. The headline confidence measures rose to -55.5 in August (vs. -62.0 forecast), up from a record low of -63.9 in July. But the current situation index fell from 17 to -9.2, its weakest level since February 2006, suggesting that annual GDP may ease further in Q3. We continue think the recent USD weakness simply reflects profit-taking after the strong climb seen over recent weeks. And looking ahead, we continue to think the medium-term trend in the USD is higher. While the US economy is starting to stabilise, it’s become evident that growth in other economies is now slowing. Last week, data in both Japan and the Eurozone showed that growth contracted in Q2 and the British Chamber of Commerce is now looking for the UK economy to head into recession. As further evidence of slowing Eurozone, UK and Japanese growth comes to hand this should help keep the USD buoyant. * Danica Hampton is BNZ’s Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.