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The New Zealand dollar benefited from a revival in investor risk appetite

Tue, May 13 2008, 06:00 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

The New Zealand dollar benefited from a revival in investor risk appetite, finishing around the middle of the pack among the major currencies. The revival was led by equity markets and financial stocks in particular – HSBC reported a $3.2bn writedown, less than the rumoured $4bn, and bond insurer MBIA rallied even after reporting a larger than expected $2.4bn loss. The classic carry trades were clearly back in favour overnight, with the NZD and AUD rising while the yen fell more than 1% from yesterday’s highs. The NZD rose back above 0.77, tentatively reclaiming the upward trendline that dates back to the low of 0.5929 in mid-2006.

The Australian dollar continued to outperform, rising back to 0.9470. Yesterday’s weak housing finance figures, and a fresh low in business confidence, failed to deter investors for long, with both the currency and interest rates bouncing back overnight. Tonight’s Federal Budget is not expected to be a market mover, with the market more focused on tomorrow’s wages data and a speech by RBA Governor Stevens later in the week.

The euro rose during a subdued session, with European markets partially closed due to the Whit Monday holiday. ECB council member Quaden commented that euro interest rates are not harming Eurozone growth, which helped the euro to tick up over 1.55. The pound rose on the better than expected HSBC result, and surprisingly strong producer prices data.

UK price pressures are building. The April PPI revealed input prices jumping 2.4% to be up 23.3% yr (their steepest since 1980), and output prices up 1.4% (7.5% yr) with core prices up 1.0% (4.6% yr). These outcomes far exceeded all expectations and show that energy, food and imported goods prices do indeed pose significant upside risks to the UK inflation outlook. We understand that these figures, and also tomorrow’s April CPI report, were made available to the Bank of England’s monetary policy committee at last week’s policy meeting; they may have been instrumental in swaying the case away from a further cut in rates.

Italian industrial production fell 0.2% in March, continuing the run of weaker activity news from across the continent that suggests some downside risk to the view that Euroland GDP growth accelerated in the quarter from Q4’s 0.4% pace (Q1 data are due this Thursday).

Canadian new house prices rose 0.2% in March. Still rising, but at a much slower pace than in mid-2007, when monthly gains averaged 1%.

Outlook

With the New Zealand economy set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, the NZD is likely to lag among the major currencies. NZ interest rates now have the steepest implied easing track among the major economies, a profile supported by weak economic data and the RBNZ’s recent dovish statements. However, this underperformance is more likely to be captured against a basket of currencies, with the US dollar still struggling to rise convincingly against the higher-yielding currencies in particular.

Locally, the main event this week is the retail sales data on Thursday. Electronic card transactions point to a small fall for the month of March, continuing the weak trend. However, general price increases over the March quarter were not as high as for fuel and food, meaning that at least some of the nominal growth in spending in Q1 was due to a rise in volumes – we expect a 0.4% gain for the quarter.

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Published on  Tue, May 13 2008, 06:04 GMT