Opinion: Kiwi on downward track as hopes for global recovery get hit

By Danica Hampton The NZD/USD slipped lower last night, as risk aversion resurfaced and hopes about a global recovery faltered. US equities skidded lower last night, led by financial stocks. Goldman Sachs' positive earnings report was overshadowed by comments from US Treasury officials, who warned that Goldman Sachs' early repayment of the TARP could hinder the recovery effort and put other banks in a bad light. At the same time, weaker than expected US data extinguished any hope about an imminent US recovery. Retail sales fell 1.1%m/m (vs. .3% forecast) and producer prices fell 3.5%y/y (vs. -2.2% forecast). The S&P500 is currently down 2.0%. Faltering risk appetite and sliding US equities encouraged investors to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. Short-term speculative players have been noted sellers of NZD over the past 24 hours. NZD/JPY slipped from around 59.00 to nearly 57.50 and NZD/USD was dragged from above 0.5900 to below 0.5840. However, it wasn't all one-way traffic in NZD. Real-money and custodial accounts were noted NZD buyers around the lows.

There wasn't much to write home about in yesterday's retail sales. Nominal retail sales rose 0.2%m/m in February, which was consistent with further slippage in retail volumes and retailers continuing to struggle. We remain comfortable being on the 50 point side of the 25/50 point debate surrounding the next central bank decision on 30 April. We continue to look for an eventual trough in the OCR of 2.00%, which is lower than current market pricing. As the market comes around to our view of NZ monetary policy, we'd expect the downward pressure on NZ interest rates to also weigh on NZD/USD. For today, against a deteriorating global backdrop, we suspect NZD/USD will struggle towards 0.5870-0.5880. Some support is expected ahead of 0.5800, but the risks remain to the downside and deeper pull back towards 0.5550 looks likely in coming weeks. The USD and the JPY firmed against most major currencies last night as US equities lurched lower and soft US data saw global recovery hopes falter. US equities slipped lower last night as economic worries overshadowed positive earnings results. While Goldman Sachs reported strong earnings for Q1, financial stocks fell following comments from US Treasury officials. The officials warned that Goldman Sachs' TARP repayment (it's recently announced a US$5b offering of common equity to repay its TARP debt) could hinder the recovery effort and put other banks in a bad light. The S&P500 is currently down 2.0%. Softer than expected US data did little to help investor confidence, serving as a reminder that the US economy is still in recession. Retail sales fell 1.1% in March, well below forecasts for a 0.3% gain. Producer prices fell 3.5%y/y in March, well below the 2.2% drop expected. US President Obama and Fed Chairman Bernanke tried to instil some confidence in the US economy (with limited success). Obama said policy makers actions were "starting to generate signs of economic progress". Bernanke said there were "tentative signs that the sharp decline in economic activity may be slowing". Renewed worries about the health of the global economy saw investors flock to the relative safely of USD and JPY. Steady selling of JPY crosses (like EUR/JPY and AUD/JPY) was noted throughout the night and this dragged USD/JPY down from 100.00 to below 99.00. Against a generally firmer USD, steady selling of EUR/JPY saw EUR/USD slip from around 1.3350 to below 1.3230. Comments from the ECB's officials probably added to the heavy tone in EUR/USD. The ECB's Constancio warned that the international response to the global crisis seemed insufficient and noted that the European recession seemed deeper than that in the US. Meantime, the ECB's Orphanides was quoted as saying the "risk of deflation has increased somewhat in the past few months". The fortunes of currencies this week will depend greatly on how global sentiment unfolds. Should global equities remain heavy and investor confidence continue to unravel, we'd expect "˜safe-haven' demand to underpin the USD and weigh on JPY crosses like EUR/JPY. In this regard, investors will be keenly watching how global equity markets react to the US banks corporate earnings releases later in the week and China's GDP on Thursday. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.