Opinion: Kiwi down slightly from 11 week high as global optimism fades

By Danica Hampton NZD/USD climbed to a fresh 11 week high of nearly 0.5980 yesterday afternoon. However, NZD/USD slipped lower last night as optimism about the global economy faded. Global equities skidded lower last night. Financial stocks were sold heavily after a prominent equity analyst highlighted the risks to the banking sector. While the break-down in merger talks between IBM and Sun Microsystems weighed on technology stocks. European indices fell about 1% and the S&P500 is currently down 1.5%. The unravelling of global equities encouraged investors to flock back to the relatively safety of the USD. Weak Eurozone retail sales and comments from ECB Smaghi (who said currency intervention was warranted in some circumstances) added to the firmer USD tone. Against a backdrop of a firmer USD and fading global optimism, NZD/USD slipped from around 0.5950 to around 0.5850. There are a few key Trans-Tasman events to watch for today. The Quarterly Survey of Business Opinion (QSBO) is due at 10:00am. The last QSBO was the worst on record so the headline measure may struggle to reach new lows. But, a substantial rebound is unlikely given the gloominess of other business sentiment measures. In Australia, the RBA decision at 4:30pm will take centre stage. After a run of fairly ambiguous data, today's decision will be a close call. Analyst surveys reveal that most are looking for "no change", but a weekend article from noted RBA watcher Alan Mitchell suggests the RBA will cut by 50bps. Market pricing is somewhere in between, consistent with a 25bps cut to 3.00%. For today, NZD/USD will probably be in a bit holding pattern ahead of the QSBO and the RBA. In the absence of the positive surprise from either release, bounces will likely be limited to 0.5920. Initial support is seen ahead of 0.5840, but a very soft QSBO or an aggressive RBA cut could see NZD/USD fall towards 0.5770. The USD strengthened against most of the major currencies last night, as global equities slipped lower and optimism about the global economy faded. After climbing strongly for the past four weeks, global equities hit a speed bump last night. A warning from a prominent equity analyst renewed fears about the banking sector and prompted a heavy sell-off in financial stocks. Technology stocks were also hit hard amid rumours that the merger talks between Sun Microsystems and IBM had broken down. European stocks fell about 1% and the S&P500 is currently down 1.5%. The slide in global equities encouraged investors to trim back currency positions in favour of the relative safety of the USD. Against a generally firmer USD, EUR/USD skidded from above 1.3600 to nearly 1.3350. Weaker than expected Eurozone retail sales (which fell 4.0%y/y in February vs. -2.5% forecast) and comments from ECB council member Smaghi did little to help EUR sentiment. Smaghi warned that currency intervention may be warranted in some circumstances, such as when markets over-react or to counter currency swings related to inadequate macro-economic policies in neighbouring countries. It's worth noting, the swap facilities between the Fed, Bank of England, ECB, Swiss National Bank and Bank of Japan were extended last night. The original agreement enabled the Fed to lend USD through the other central banks in order to reduce tensions in USD cash markets. The new arrangement also allows the Fed to borrow foreign currencies (GBP30b, EUR80b, CHF40b and JPY10t) to lend to US institutions. At this stage, US institutions don't seem to have strong demand for foreign currency funding. Some market commentators have suggested this is a contingency plan allowing the Fed to secure offshore funding (perhaps a backstop for intervention funding should the USD weaken markedly?). The fortunes of currencies this week will depend greatly on whether or not the global equity market recovery continues. Investor sentiment is fragile and we are mindful that should equity markets start to slide, then the recent USD weakness could be quickly reversed. There is also a lot of key data due out of the Eurozone over the next few weeks. Should this data disappoint and investors become concerned European policy makers aren't doing enough to promote economic growth this will likely add weight to EUR/USD. A break below support in the 1.3350 region, will suggest a deeper correction towards 1.3180-1.3200 in 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.