Forex Investment and Currency Trading

Fitch affirmed New Zealand’s AA+ rating today (one notch below its top rating), but in a surprise move, revised its outlook to Negative from Stable, highlighting a weak medium-term growth outlook, rising external debt and a large current account deficit. Fitch’s move was a surprise to the market, given the positive reaction to the Budget in late May from Moody’s and S&P. Following the Budget, Moody’s announced that the outlook on New Zealand’s Aaa sovereign credit rating remained Stable, and S&P upgraded its outlook to Stable from Negative. The market will now be watching the reaction of Moody’s and S&P to Fitch’s move.

The Fitch news is a negative for the NZD. New Zealand relies on foreign purchases of its debt to finance its current account deficit, and a potentially lower credit rating increases the risk premium on holding New Zealand assets. We do not expect an outright capitulation of the NZD at this stage, as S&P and Moody’s have yet to follow Fitch’s move. If they do, and place New Zealand foreign-currency sovereign debt on CreditWatch Negative, the NZD would face more significant downside.  

China: Stronger than expected GDP

Q2 GDP growth of 7.9% y/y was slightly stronger than expected, and the monthly activity indicators are broadly in line with market expectation. This reinforces the long-held view of a strong growth recovery over the course of 2009. We expect growth to remain strong in H2, yielding a further large pick-up in the y/y growth rate, although q/q growth is likely to moderate. The latest data releases point to moderate upside risk to our projection of 7.8% growth for 2009 as a whole.

Strong GDP growth, coupled with the extraordinary pace of credit expansion, has increased the risk of policy tightening. The central bank has already started to gently tighten interbank liquidity through open market operations, and money market interest rates were guided higher over the past few weeks. More substantive tightening - in the form of quantitative measures, such as hikes in the reserve requirement ratio (RRR) - is likely if economic data are in line expectations in the next few months. Renewed window guidance on bank lending is also possible if bank credit growth continue to surprise on the strong side.

Strong bounce in risky assets

The rally in risky assets continued overnight as the macroeconomic data and US earnings reports continued to surprise broadly to the upside. Analysts note that despite the rally in the S&P50 is overnight, the VIX index moved higher. They also note that since December, 66% of the time when a spike higher in the S&P500 has been accompanied by a move higher in the VIX index, there has been a decline in the S&P500 the following day by on average 18-19 points. Having said that, US earnings reports today will remain the main driver of risky assets and equity analysts look for more above consensus earnings outcomes. We note that the rally in equities recently may represent the pricing in of above market earnings outcomes, so significant upside surprises may be needed for the rally in risky assets to continue.