Opinion: Signs of bigger fall if Kiwi breaks below 55 USc today

By Danica Hampton The NZD/USD has spent the past 24 hours consolidating within a 0.5500-0.5650 range. While global equities recorded modest gains last night, fears about the global recession continued to take a toll on growth sensitive currencies like NZD. As a result, we've tended to see NZD/USD trade choppily within familiar ranges. Overnight, there was a lot of focus on the UK Budget and the huge surge in the UK's government borrowing plans. This saw GBP sold heavily and GBP/USD plunge from above 1.4650 to around 1.4400. It's also worth noting; the IMF's latest World Economic Outlook has the global economy contracting 1.3% this year "“ its deepest recession since World War II - and well below Consensus forecasts. While the NZD/USD was largely caught up in the global melee last night, it's worth noting that the downward pressure seen on NZ interest rates over recent weeks also adds to the case for a weaker NZD/USD. NZ-US 3-year swap spreads have narrowed about 15bps already this week, from 2.35% to 2.19%. The narrowing of NZ-US interest rate spreads has seen the "˜fair value' range for NZD/USD (according to our short-term valuation model) fall from 0.5500-0.5750 to around 0.5450-0.5650 already this week. Looking ahead, we still think the market is underestimating the scope for further monetary policy easing. We continue to look for an eventual trough in the OCR of 2.00% and rates remaining low for a good while to come. As the market comes into line with our view, we'd expect the downward pressure on NZ interest rates to also weigh on NZD/USD. For today, lingering concerns about the global backdrop should ensure bounces in NZD/USD are limited to the 0.5600-0.5625 region. A break below support in the 0.5490-0.5500 region will suggest a deeper correction is on the cards. Modest gains in global equities and reduced "˜safe-haven' demand saw the USD fall on a trade weighted basis last night, but it was really GBP that took centre stage. GBP was sold heavily across a broad range of currencies after British Finance Minister Darling unveiled the UK Budget. Not only did Darling warn that the UK economy could shrink 3.5% this year "“ its worst year of growth in over 60 years. Darling also projected a massive increase in public debt (borrowing is likely to expand to GBP175b, about 12% of GDP) and a personal tax increase (income over GBP150,000 will be taxed at 50% up from 40%). Worries about the health of the UK economy and how it's going to sustain its borrowing needs sent GBP/USD sharply lower; from above 1.4650 to below 1.4400. Heavy selling of GBP against EUR was also noted. EUR/GBP spiked from 0.8850 to above 0.8975 and this helped underpin EUR/USD. In fact, EUR/USD edged up from below 1.2950 to above 1.3000. Global equities chalked up modest gains, despite lacklustre financial stocks. Morgan Stanley posted a second consecutive quarterly loss of 57 cents per share (worse than analyst estimates of 9 cents) and cut its quarterly dividend to 5 cents a share. Nonetheless, equities managed to eke out gains, thanks to a stronger than expected house price index (it rose 0.7%m/m in February vs. -0.7% forecast) and reassuring comments from General Electric (who said its finance unit will post a profit this year). The FTSE rose 1.08%, the DAX rose 2.06% and the S&P500 is currently up 0.87%. Looking ahead, this is still plenty to watch out for this week. Overnight's the Eurozone PMI and PSI indicators will provide an update on the European economic outlook. The US Treasury is due to reveal the "˜stress testing' methodology on Friday and the G20 meet this weekend in Washington. We suspect the G20 will focus on the dire state of the world and ways to shore up global economy. In its latest World Economic Outlook, the IMF said the global economy would likely contract 1.3% this year "“ its deepest recession since World War II "“ and urged governments to take forceful action to ensure the global economy gets out of recession. While there may be some discussions about China's suggestion that the USD should eventually be replaced as the world main reserve currency, we are not expecting any surprises on the currency front. _________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.