fxmatters

Risk returned last week in many guises, with NZ to the forefront. Generally weak activity/profit figures (globally) and potential credit-rating downgrades (NZ, Portugal, Spain and a downgrade delivered for Greece) were the key themes.

However there were some hopeful signs: many share markets rallied on Friday, and the EUR/JPY appreciated; while fiscal and monetary stimuli continued to be delivered. The global tension between fear and hope is likely to persist in the weeks ahead (rather than one dominate) and hence the most likely scenario remains the major currencies trading within a broad sideways pattern (recall the low points for the EUR/USD and AUD/USD were now 12 weeks ago and these trends are key determinants of the NZD/USD). This suggests a strong chance that the NZD/USD remains above 50c.

But there is a major difference between Oct-08 and now: it is starting to hit home just how much the global difficulties will impact on NZ output/profits and, consequently, on NZ government finances. Two sharp jolts were delivered last week in the form of very weak business confidence and a downgrade warning for the Government’s offshore credit rating. The net effect was a quick narrowing of the gap between NZ and Australian interest rates (see Interest Rate Futures). The RBNZ rate is likely to deliver another large rate cut 29-Jan (maybe 1%) and, consequently, the NZD is expected to experience general weakness heading into the announcement.

All in all, this confluence of global and local forces suggests opportunities to buy NZD/USD near the bottom of the recent range will emerge while the NZD/AUD cross-rate could slip below 80c near-term.