Opinion: Kiwi$ falls below 71 USc on fears China lending freeze may hit global recovery

By Danica Hampton The NZD has been the one of the worst performing currencies over the past 24 hours. After climbing to nearly 0.7170 yesterday morning, NZD/USD slipped below 0.7030 last night. Once again, the NZD has been knocked by fears about the global outlook. Yesterday China implemented an increase in bank reserve ratio requirements, which sparked concern that a slow-down in Chinese growth could de-rail the global economic recovery. Asian equities nose-dived (the Shanghai dropped 2.4%) and risk aversion saw investors ditch growth sensitive currencies like the NZD in favour of "safe-haven" currencies like the USD and JPY. NZD/JPY fell from nearly 65.00 to around 63.00 and NZD/USD was dragged briefly below 0.7030. However, NZD/USD rebounded off its lows towards the end of the night. Sentiment was helped by stronger-than-expected US consumer confidence data (it rose to 55.9 in January, well above the 53.5 forecast) and modest gains across Wall Street. The key event for the AUD and NZD today will be Australia's CPI release. Investors are closely watching this release for clues as to what the RBA will do at next week's policy meeting. It's really the underlying inflation measures that matter for RBA policy. A recent media article (from noted RBA watcher Terry McRann) suggests that if underlying inflation prints at 1.0%q/q or higher "a rate hike would be all but certain". And conversely, a 0.6%q/q result would ensure the RBA pauses at next week's meeting. Whatever the outcome, expect NZD to be dragged around on the coat-tails of the AUD. While worries about the global outlook have kept NZD/USD fragile so far this week, we continue to think that dips below 0.7000 will be short-lived. After Australian CPI the focus will shift to tomorrow's FOMC meeting. We expect the Fed to leave policy unchanged and reiterate that rate will remain very low for an "extended period" and so wouldn't be surprised to see the USD weaken on the back of this. The USD strengthened against all the major currencies last night amid escalating concern about the global outlook. Chinese officials implemented the latest rise in reserve ratios requirements yesterday. New lending at Chinese banks has been suspended since 19 January and last week the PBOC instructed some banks (reportedly CITIC China's 7th largest bank and China's largest lender ICBC Bank) to increase reserve ratios by 0.5%. Yesterday the PBOC said the higher reserve ratio requirements must be effective as of Tuesday. The negative news kept coming out of Asia. Ratings agency Standard & Poor's expressed concern about fiscal troubles afflicting Japan. S&P warned that Japan's rating could be cut if the government fails to come up with measures to spur growth. China's efforts to curb bank lending are aimed at preventing the economy from overheating, but investors fear slower Asian growth could de-rail the global recovery. Asian equities fell heavily "“ the Nikkei fell 1.8% and the Shanghai index fell 2.4%. Risk aversion saw investors ditched growth sensitive currencies like NZD and AUD in favour of the relative safety of the USD and the JPY (despite the concerns about Japan's credit rating). EUR/USD slid from nearly 1.4180 to below 1.4050, despite the slightly better-than-expected German IFO Business Survey. The business climate index rose to 95.8 in January, well above the 95.1 expected. Head of Eurogroup, Juncker, expressed unhappiness with the "overvalued" EUR and noted both the USD and CNY were undervalued. GBP/USD fell sharply from above 1.6250 to below 1.6100. GBP was also weighed down by disappointing Q4 GDP figures. While the 0.1%q/q gain in UK GDP confirmed the economy is now out of recession, it fell short of the 0.4% forecast by economists. Nonetheless, the Bank of England will likely keep both interest rates and its quantitative easing policies unchanged at next week's meeting. However, currencies started to stabilise towards the end of the night. While Asian equities were weak, European indices were mixed. The FTSE was flat and the DAX rose 0.61%. Wall Street has been helped by stronger-than-expected US data. Conference Board Consumer Confidence rose to 55.9 in January, well above the 53.5 forecast. The S&P500 is currently up 0.4%. The next key events FOMC decision (8:15am NZ time) and Obama's State of Union address. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.