Opinion: Kiwi$ falls as World Bank warns of deeper recession

By Danica Hampton After starting the week around 0.6450, NZD/USD slipped lower to nearly 0.6300 last night. Growing concern about the outlook for global growth pressured growth sensitive currencies like NZD. The World Bank warned that the global recession will be deeper than it predicted in March. It's now forecasting global growth to drop 2.9% this year, which is worse than its previous forecast of -1.7%. Growing doubt of the global "green shoots" saw equity markets and commodity prices fall heavily. European indices dropped 2.5-3% and Wall Street is down about 3%.The CRB Index, a broad measure of commodity prices, slipped 2.7%. Escalating fears about the global outlook, weak equities and falling commodity prices encouraged investors to ditch growth currencies like NZD in favour of the relative safety of the USD and JPY. Short-term speculative players took the opportunity to square up long NZD positions, while custodial accounts and real money funds were noted sellers of both NZD and AUD. NZD/JPY fell from above 62.00 to below 60.50 and NZD/USD was dragged down to nearly 0.6300. Comments from Prime Minister, John Key, may have also helped the weaker NZD tone. Key warned that the rising NZD could derail the recovery and a strengthening currency was counter to what was required. There's also been some focus on the whopping NZ$4.6b worth of Eurokiwi and Uridashi that mature in July (this is well above the usual month maturities of NZ$1-1.2b). Uridashi and Eurokiwi investors tend not to hedge their currency exposure. As such, upcoming maturities are a potential downside risk to the NZD should these investors decide to switch out of NZD denominated assets. For today, growing concern about the global backdrop should ensure that bounces in NZD/USD are limited to the 0.6360-0.6380 region. Initial support is seen around June 18 low of 0.6290, but a break below this level will open up the downside towards 0.6235. The USD strengthened against most major currencies last night, as investors worried about the global outlook, weak equities and the Eurozone economy. Worries about the global outlook resurfaced last night. Not only did the World Bank say the global outlook was "unusually uncertain", but it cut its 2009 growth forecasts for the Eurozone, Japan and US. The OECD warned that "we see a very difficult 2009" and that "unemployment problems are going to continue to linger". Meantime, the weekend's media reports that China is likely to slow its commodity stock piling dramatically added to the general concern. The renewed global uncertainty took a toll on equity markets. European markets fell 2.5-3% and the S&P500 is currently down 3%. All in all, it seems the much talked about "green shoots" are browning badly. In currency markets, this was enough to see investors ditch growth sensitive currencies in favour of the relative safety of the USD and the JPY. After starting the week above 1.3950, EUR/USD slipped to around 1.3830 last night. EUR/USD was pressured by EUR/JPY supply and by comments from ECB officials. ECB President Trichet acknowledged that the Eurozone was still in a downturn phase, but said "the present rates are appropriate". The ECB's Nowotny also said the ECB is unlikely to change rates this year. A relatively uninspiring German IFO survey did little to help EUR sentiment. The IFO business climate index rose to 85.9 in June, in line with the 85.0 forecast. Later in the session, the uptrend in the USD stalled. IMF chief economist Blanchard said "fairly substantial adjustments" might be needed in the value of the dollar in order to achieve a big export boost needed for a sustainable US recovery. Although the Fed is widely expected to leave both rates and its quantitative easing program unchanged, the FOMC statement will be the key event this week. If the Fed reiterates that interest rates in the US will remain low for some time to come (and conveys a sense that rate hikes are unlikely before year-end) the USD will likely come under fresh selling pressure (expect the USD Index to re-test support in the 79.00 region). However, if the FOMC hints that its ultra easy monetary policy can't last forever and that it's time to starting thinking about an exit strategy, the USD may extend its recent recovery (expect the USD Index to re-test resistance in the 81.50 region). ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.