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The New Zealand dollar reached its lows around 0.7620 yesterday

Tue, Jan 8 2008, 05:48 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar reached its lows around 0.7620 yesterday afternoon, on further evidence that the housing market has hit a brick wall. Barfoot and Thompson housing figures for Auckland and Northland showed a 37% fall in sales from a year ago, though prices remained steady. The NZD picked up back towards 0.7670 on rumoured Asian central bank bids, but its gains were capped by a soft start to US equity markets. Rumours that a North American investment bank was about to announce $10bn of sub-prime mortgage write-offs, and news of a confrontation between US and Iranian ships in the Persian Gulf, weighed on investor sentiment.

The major currencies bounced around within familiar ranges overnight, with equity-watching once again the order of the day. The Australian dollar found steady buying below 0.8700, but nevertheless gave back all of the gains made against the NZD after the soft housing figures. The yen softened as some of the strong gains made while Japanese markets were closed were gradually unwound. Demand for overseas assets through investment trusts provided steady demand for yen crosses. The euro fell below 1.47 on stoploss selling, and bounced around this level for the rest of the day.

There was no US data overnight, but US interest rates headed lower again as market expectations continued to veer towards a 50bp rate cut at the Fed’s 31 January meeting. Atlanta Fed governor Lockhart said that the negatives for the US economy appear to be gaining momentum, and that he is more concerned about growth risks than inflation risks. The ten-year bond yield fell to 3.84%, down about 5 basis points for the day. We have seen some emerging interest to push interest rates lower in other markets that are tied to the world growth outlook – more so in Australia than in New Zealand so far.

Euro zone data on balance fell on the side of growing inflation pressures. The unemployment rate remained steady at 7.2% in November; this rate has come down considerably over the past years, increasing the risk of second round inflation via higher wages. November producer prices rose slightly more than expected to 4.1% yoy, mainly due to higher energy prices. However, even excluding energy the annual rate was 3.2%, well above the ECB’s upper limit for price stability. Economic sentiment dropped to 104.7 in December, though was slightly stronger than expected.

ECB President Trichet noted that global growth remains robust “even if there is a little bit of a slowing down”. However, he appeared to moderate his hawkish rhetoric a little, acknowledging that the impact on the real economy from financial market turmoil is “still to be fully understood” and it will depend “very much on the overall situation of various parts of global economy”.

Outlook

Financial assets that are sensitive to the world growth outlook have been under pressure in recent days – for example, the Dow Jones index is down 4.2% in the last week or so. The New Zealand dollar has largely resisted this pressure so far – in fact, it has been remarkably stable in the last few months, given the turmoil in markets overseas. But the uncertain global picture suggests that further gains in the NZD will continue to be a struggle, and it remains vulnerable to sharp dips lower.

Locally, economic data is thin on the ground until mid-month, with the CPI the next key release. Headline inflation is likely to breach 3% this time around, but this is already widely expected. In contrast, we expect the Australian inflation figures to be strong enough to prompt the RBA into raising rates again in its early February meeting; certainly the RBA’s determination to raise rates even in a shaky global environment will have a bearing on expectations of further action from the RBNZ as well.

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Published on  Tue, Jan 8 2008, 05:51 GMT