Opinion: Kiwi likely to fall in coming sessions following roller coaster ride

By Danica Hampton Currencies have been a bit of a roller coaster ride over the past 24 hours and NZD/USD has spent most of the night within a 0.5620-0.5700 range. After falling to nearly 0.5620 late yesterday afternoon, NZD/USD was dragged higher by strong gains in AUD and GBP. Real money accounts had a strong appetite for both AUD and GBP, which was thought to be related to equity and dividend flows. Despite worries about a swine flu pandemic, and the Japanese government cutting its GDP forecasts for 2009, NZD/USD managed to climb above 0.5700. However, the NZD/USD strength didn't last long. Comments from ECB officials prompted a heavy bout of EUR/USD selling and this was enough to knock NZD/USD back below 0.5650. ECB council member Nowotny warned the ECB was ready to use quantitative easing if necessary. ECB President Trichet said details of "non-standard" measures would be released at the ECB's next meeting (May 8). Locally, this week's key event will be Thursday's RBNZ decision. Current market pricing is consistent with about a 50% chance of a 50bps cut to 2.50% this week and the OCR troughing somewhere between 2.25-2.50%. We continue to think the market is underestimating the scope for further monetary policy easing "“ we look for a 50bps move this week and an eventful trough of 2.00%. The "˜fair value' range for NZD/USD (according to our short-term valuation model) has fallen from 0.5700-0.5900 to around 0.5500-0.5700 over the past fortnight (thanks to NZ-US 3-year swap spreads falling about 35bps to 2.22%). This suggests there isn't a compelling fundamental reason to chase the NZD/USD significantly higher from here. For today, we suspect NZD/USD will struggle to push above 0.5700-0.5725. Initial support is seen around 0.5620-0.5640, but the risks remain skewed in favour of deeper correction in coming sessions. The USD firmed against all the major currencies last night, as falling global equities prompted risk aversion and comments from ECB officials weighed on EUR. Fears about swine flu are keeping global equity markets skittish. There's been another 46 reported deaths in Mexico (bringing the death toll to 149) as well as 40 reported cases in New York. Scotland and Spain have confirmed cases and France, Italy and Israel have suspected cases. So far the only reported deaths are in Mexico and the Mexican Peso (MXN) has fallen about 6.5% against the USD since Friday. Nonetheless, worries about a global pandemic have kept equity markets defensive as stocks related to travel and tourism fell. The FTSE rose 0.27%, the DAX rose 0.42% and the S&P500 is currently down 1.1%. Investors are worried that should swine flu become more widespread and fatalities increase, the disruption to trade, travel and work places could delay a recovery in the already fragile global economy. In 2008, the World Bank estimated that a flu pandemic could cost US$3t and may result in a nearly 5% drop in world GDP. Back in 2003, SARS cost the Asia Pacific region an estimated US$40b. Worries about the global economy have seen investors ditch growth sensitive currencies in favour of the relative safety of the USD and the JPY. The EUR fell the most heavily against the USD last night, falling from around 1.3200 to below 1.3000. ECB council member Nowotny said "new discretionary stimulus spending is needed" and said the ECB is ready to use quantitative easing if necessary. These comments follow recent comments from Wellink, who implied that interest rates would fall to 1% in May. ECB Trichet said that full details of further "non-standard" measures would be released at the ECB's next meeting in May. Macro driven funds and longer-term real money accounts have been noted sellers of EUR over the past 24 hours. Initial support is seen ahead of 1.2980, but a correction back towards 1.2890-1.2900 looks likely in coming sessions. The Japanese government slashed its economic forecasts, and now expects GDP to fall 3.3% over year ahead. The government has now formally approved a US$159b stimulus plan, which is expected to be primarily funded through new bond issuance. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.