Opinion: Kiwi$ weakest currency in world over last 2 days as global growth fears gather momentum

By Mike Jones The NZD has been the weakest performing currency over the past 24 hours, for the second day running. Having started the week around 0.7350, the NZD/USD is now closer to 0.7120. After hitting 20-month highs last week, global risk appetite has soured over the past few days, denting demand for "˜growth-sensitive' currencies like the NZD. Our risk appetite index (which has a scale of 0-100%) has fallen from 69% at the start of last week to 57%. Not only have Greece's fiscal woes highlighted concerns about sovereign debt, but global equity markets have plunged. Last night, financial stocks were hit hard by news US President Obama plans to crack down on US banks' risk taking operations. The S&P500 is currently down around 1.8% (US financial stocks are down 3%). Weakness in global equities and a drop in risk appetite saw investors flock back into "˜safe-haven' currencies like the USD and JPY. As a result, NZD/JPY fell from 66.30 to below 64.30, dragging NZD/USD below 0.7150 in the process.

Yesterday's upbeat retail sales data offered some brief respite for the NZD. Indeed, November's retail trade report was more positive than it appeared. While the headline gain, of 0.8%, was not substantially higher than the 0.5% expected, the 0.8% advance in ex-auto spending certainly was. What's more, the upward surprise (and the fact Wednesday's CPI implied retail prices will be on the weak side) helps set the scene for a bigger jump in Q4 retail volumes than we previously thought. China's latest data dump, released yesterday, provided a few headwinds for "˜growth-sensitive' currencies like AUD, CAD and NZD. Most notably, Chinese inflation accelerated to 1.9%y/y (1.4% expected) in December, raising fears further action may be needed to slow the Chinese economy. For today, we suspect the headwinds from reduced risk appetite and caution about the global outlook will keep NZD/USD heavy. Initial support is seen towards 0.7080. Currency markets were relatively volatile last night. While the USD briefly hit a 4-month high, it ended the night more or less unchanged. Despite a better-than-expected earnings report from Goldman Sachs, global equity markets were battered last night for the second day in a row. European stocks fell 1.5-2% and the S&P500 is currently down around 1.8% (bringing the cumulative fall over the past two days to -2.7%). Financial stocks led the declines (the S&P Financials index is down about 2.5%) after US President Obama announced a plan to limit the size and scope of US banks' trading activities, including a possible ban on proprietary trading. Weakness across global equities took a toll on risk appetite and commodity prices. The VIX index (the implied volatility of the S&P500 commonly used as a measure of risk aversion) spiked above 21% from as low as 17% at the start of the week. Meanwhile, the broad CRB commodity price index is down around 1%. Gold prices fell just over 1% to US$1100/ounce while oil prices are down nearly 1.5%. With risk appetite retreating, investors tended to sell "˜growth-sensitive' currencies in favour of safe-haven currencies like the USD and JPY. USD/JPY slipped from above 91.50 to nearly 90.50. But it was weakness in GBP that led the gains in the USD. Despite coming in slightly better than expectations, last night's UK public sector borrowing figures provided a stark reminder of the parlous state of the UK's finances. And this, combined with the 1.1%m/m fall in December M4 money supply figures (+0.9% expected), saw GBP/USD slip from 1.6300 to nearly 1.6150. EUR was weighed down by ongoing concerns about European sovereign solvency. Greek bond spreads blew out to 311bps over 10-year German bunds after the European commission quashed speculation EU officials were preparing a loan package for Greece. The IMF also said that Portugal's budget deficit could "test the limits" for Portugal's sovereign rating. EUR/USD slumped to a 6-month low around 1.4030, before rebounding slightly later in the night. Looking ahead, the data calendar is relatively light tonight. Nevertheless, the general backdrop of equity market weakness and elevated risk aversion is expected to keep the USD Index well supported on any dips towards 77.50. Initial headwinds are expected towards last night's high of 78.80. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.