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The New Zealand dollar slid back below 0.80

Mon, Mar 31 2008, 06:10 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar slid back below 0.80 on another tough night for riskier assets. The high-yield currencies started out strong, with notable demand in the yen crosses, related to the launch of a number of Japanese offshore investment trusts. But weakness in US equities, fuelled by rumours that another US broker was in trouble, undermined the NZD and AUD and boosted the yen later in the day.

The euro received a short-lived boost from more hawkish comments by ECB officials. Germany’s Weber said that the ECB will act as needed to ensure price stability, and that inflation pressures are “alarming”, while council member Stark said that market expectations of rate cuts are “unhelpful”.

The pound in particular came under fire due to soft data and negative sentiment, dragging the other high-yield currencies lower to a degree. Reports in the Financial Times about rising mortgage rates and increasing concerns over the outlook for UK housing saw the pound start out weaker. This wasn’t helped by a worse than expected 0.6% fall in the Nationwide BS house price measure for March, the fifth consecutive monthly fall. The GfK consumer confidence index also crumbled to –19, a 15-year low.

The final estimate of UK Q4 GDP, bang on expectations at 0.6%, helped to temper the poor sentiment a little. Annual growth was nudged down fractionally to 2.8% from 2.9%. The detail showed consumer spend all but stalled, increasing by just 0.1% (revised lower from 0.2%), government spend declined 0.5% (a sharp downgrade from a 0.9% rise), while business investment was revised higher to a 1.8% increase (from a 0.5% fall). The Q4 current account deficit narrowed sharply to £8.5bn from a record £19.1bn in Q3, driven by a £10.1bn drop in earnings on direct investment in the UK as foreign owned banks operating in the UK suffered losses due to the financial market turmoil.

US consumer spending stalled in February. Real consumer spend was unchanged in the month, after a 0.1% rise in Jan and a 0.1% fall in Dec. In nominal terms, spending inched 0.1% higher in Feb. Total income surprised on the high side, rising 0.5% in the month. Incomes were boost by an increase in government Medicare prescription drug payments. Wage income rose by 0.3% in Feb. The inflation news was positive, as retailers struggle to pass on higher prices in this environment. The core PCE deflator increased by 0.11% and by 1.96%yr in Feb, while Jan was revised lower to 0.2% (from 0.3%) and 2.02%yr (down from 2.2%).

The University of Michigan consumer sentiment index for March was revised 1pt lower to 69.5. This downgrade was concentrated in the economic outlook component (60.1 vs 61.4 prelim). The jump in one-year ahead inflation expectations was scaled back a touch, 4.3% vs 4.5% prelim. By contrast, five-year ahead inflation expectations are moving sideways. This suggests that underlying inflation expectations are well anchored, with consumers looking through short-term pressure from energy and food prices.

The Euroland retail PMI unwound the February blip, falling back to 48.2 in March. That was the fifth sub-50 reading in the last six months, taking sales in March below that of a year-ago. Consumer confidence in Europe remains at the lowest level in more than two years, as household disposable income is hit by rising costs. Inflation, boosted by higher food and energy prices, is running at 3.2%, the highest since 1993.

Outlook

The New Zealand dollar failed to make any mileage from last week’s positive economic data – the trade balance, current account and GDP all beat forecasts – and data this week looks less supportive. Building consents (today) are likely to see a down month, and there is little reason to expect either business confidence (today) or employment confidence (Wed) to be any perkier. However, the US dollar remains under pressure due to the relative economic outlook, with little indication so far that the rest of the world is in danger of following the US into recession. This limits the downside for NZD for now, but we suspect that traders will continue to sell into any gains.

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Published on  Mon, Mar 31 2008, 06:14 GMT