BNZ Daily FX Wrap & Strategy - 9 Feb 2009

BNZ Daily FX Wrap & Strategy

NZD

NZD/USD surged dramatically higher on Friday night, amid improving risk appetite after an abysmal US non-farm payrolls spurred hope that Congress would act quickly to pass Obama's stimulus package.

US non-farm payrolls fell 589,000 in December (the biggest decline since 1974) and the unemployment rate rose to a 16 year high of 7.6%. While the employment report was clearly awful, investors were cheered by hopes that it would silence the Republican criticism of Obama's proposed stimulus bill. News that US Treasury will unveil a new banking bailout bill also helped lift investor sentiment.

The S&P500 surged 2.7% on Friday night and this fuelled demand for triggered a risk sensitive currencies like NZD/JPY and a generalised bout of USD weakness. NZD/USD climbed more than 3%, from below 0.5150 to above 0.5350.

Over the coming week, the performance of US equities will be the key to the fortunes of the NZD. While there is a bit of US data due out this week, the vote on Obama's stimulus bill and the unveiling of the US Treasury's new bank bailout plan will likely overshadow everything else.

Over the weekend, various media reports suggested the stimulus bill is running against stiff opposition and unlikely to be passed until Tuesday. In addition, it looks like the US Treasury will not release details of the new bank bailout plan until after the bill is passed. As such, the delay and uncertainty surrounding the US stimulus measures may be cause for a bit of disappointment and help limit the topside in NZD/USD today.

Initial resistance is seen ahead of 0.5365, but a push up towards 0.5500-0.5550 is possible if the US stimulus measures and new bank bailout package helps restore investor confidence and produces a more sustained rebound in global equities this week.

Locally, the economic news is still uninspiring. Quotable Value showed that NZ's house prices fell for seventh consecutive month to 8.3%y/y in January. This week's data will likely reaffirm the problems afflicting the retail sector of late. Wednesday's Electronic Card Sales will provide the first hint at how household spending shaped up in January, while Friday's retail sales report should provide a more detailed picture on spending in the last quarter of 2008.

Majors

The USD fell sharply against most major currencies on Friday, after a bleak US jobs report spurred hopes that Congress will act quickly to pass a stimulus package to help the economy, reviving investor appetite for risk.

US non-farm payrolls fell 598,000 in December, worse than the 540,000 decline forecast and the biggest monthly drop since December 1974. It was also accompanied by downward revisions; the net effect has seen the previously reported number of US job losses rise from 2,589m to 2.974m. The unemployment rate also rose to 7.6% (from 7.2%) – its highest level since 1992.

While the employment report was clearly abysmal, investor were cheered by hopes that it would silence the Republican criticism of Obama's proposed stimulus bill. Hopes for a swift approval of the estimated US$800-900b stimulus package, combined with anticipation of new measures designed to shore up credit markets (details to be released on Tuesday) bolstered US equity markets. The S&P500 climbed 27% on Friday night and finished the week 5.2% higher.

The sharp rebound in US stocks reinvigorated demand for risk sensitive currencies. Heavy buying of JPY crosses like EUR/JPY quickly emerged. EUR/USD was propelled from below 1.2800 to nearly 1.3100, GBP/USD climbed from around 1.4600 to above 1.4800 and USD/JPY edged up from around 91.00 to above 92.00.

For the coming week, expect the performance of US equities to once again be the key driver of currencies. While there are several corporate earning reports and some key US data towards the end of the week, the Senate's vote on Obama's stimulus bill and the unveiling of US Treasury's new bank bailout plan will likely overshadow everything else.

Media reports over the weekend suggesting the stimulus bill is running against stiff opposition and unlikely to be passed before Tuesday. Meantime, in order to keep Washington's focus firmly on the stimulus bill, Obama's economic advisor Summers has said details of the new bank bailout plan will not be released until at least Tuesday The delay and uncertainty surrounding the US stimulus measures may be cause for a bit of disappointment early in the week. As such, we wouldn't be surprised to see a bit of USD strength and weakness in JPY crosses first up.

For other Bank of New Zealand research, such as the Markets Outlook and the Economy Watch, please go to www.bnzmarkets.co.nz.

ENDS

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