Opinion: Kiwi bounces around, almost at 58 USc but likely to fall again

By Danica Hampton NZD/USD spent most of the night chopping around in a 0.5700-0.5800 range, as risk appetite ebbed and flowed. Risk aversion dominated through yesterday's Asian session. Much focus was given to the weak state of affairs in Ireland and the emergency Irish budget (the government cut fiscal spending in order to curb the rapidly rising fiscal deficit). Fears about the global outlook saw investors trim positions in growth sensitive currencies like NZD in favour of the relative safety of USD and JPY. NZD/JPY slipped from 58.00 to below 57.00 and NZD/USD was dragged below 0.5700. NZD/USD recovered a bit as risk appetite was cheered by Japan's new fiscal stimulus package, which will likely total US$150b (about 2% of GDP). Profit-taking ahead of the Easter holiday probably also provided a bit of support. NZD/USD pushed to nearly 0.5800 before stalling. It didn't take long for the risk aversion to resurface again. Ratings agency Fitch cut the ratings of Latvia, Lithuania and Estonia. The FOMC did little to inspire confidence in the global economy; the Fed said there was "concern about downside risks to an outlook for activity that was already weak" and cut its projections for US GDP in the second half of 2009 and 2010. And the various data releases (including US wholesale inventories and German factory orders) disappointed expectations. Keep an eye out for the Australian jobs data (1:30pm), where the market is looking for employment to drop by 25,000 and the unemployment rate to rise to 5.4%. Should this data disappoint, we could well see NZD/AUD move back towards 0.8250 as investors are squeezed out of short positions. For today, with the global backdrop not providing too much in the way of support, we suspect NZD/USD will struggle above 0.5800 (and bounces will likely be limited to 0.5825). Initial support is seen around the overnight low of 0.5700, but the risks remain to the downside and a pull back towards 0.5550 looks likely over the coming week. The JPY was the strongest performing currency last night, as worries weak global equities and fading global optimism boosted the JPY's "˜safe-haven' appeal. Global equities put in a mixed performance last night as investors worry about the upcoming corporate earning season. Bloomberg polls show that analysts expect earnings across S&P500 companies to have fallen 37% in the first quarter of 2009. The DAX rose 0.8%, the FTSE fell -0.4% and the S&P500 is see-sawing but has eked out modest gains. Last night's economic news was lacklustre. In Germany, factory orders fell 3.5% in February (vs. 2.1% forecast), which doesn't bode well for tonight's industrial production. In the US, wholesale inventories fell 1.5% in February, worse than the 0.7% decline forecast. The FOMC minutes from the March 17-18 meeting did little to inspire confidence in the global economy. The minutes said "credit conditions remain very tight, and financial markets remain fragile and unsettled" and there was "concern about downside risks to an outlook for activity that was already weak". The Fed said it had lowered its projections of US GDP in the second half of 2009 and into 2010, reflecting widespread job losses and contracting industrial production. As such, the FOMC agreed that "substantial additional purchases" of a range of longer-term assets was appropriate to deal with the steep drop in economic activity. Ongoing worries about the global outlook and corporate profitability saw investors bail out of riskier currency pairs like JPY crosses. Widespread selling of EUR/JPY, GBP/JPY and AUD/JPY was noted last night. After climbing to nearly 137.50 on Monday, EUR/JPY fell below 131.00 last night. Steady selling of JPY crosses saw USD/JPY fall from around 100.50 to below 99.50. After falling below 1.3150, EUR/USD rebounded off its lows as US equities eked out modest gains. However, investors are still wary about the outlook for EUR. Not only is Ireland clearly in economic distress (yesterday the Irish government raised taxes and cut spending in order to curb the rapidly expanding fiscal deficit), but ratings agency Fitch cut its rating from "AAA" to "AA+". Fitch also cut ratings on Latvia, Lithuania and Estonia. In the near-term, we continue to think bounces will be limited to 1.3350. Key support is seen around 1.3120-1.3140, but a break of this level will suggest a deeper correction towards 1.2850 is on the cards. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.