By Danica Hampton
After climbing above 0.5050 yesterday afternoon, NZD/USD skidded below 0.4950 last night.
The World Bank predicted the global economy would shrink in 2009 for the first time since World War II and forecast that global trade would decline for the first time since the early 1980s. Meanwhile, Moody's downgraded the outlook on HSBC (from stable to negative) and the financial strength outlook on Lloyds (from B to C+).
Escalating concern about global recession and the health of the financial sector encouraged investors to ditch growth sensitive currencies like NZD in favour of the relative safety of USD. Over the past 24 hours, NZD selling has been noted by Japanese accounts and longer-term real-money investors.
While the NZD/USD slipped lower last night, it's difficult to get overly excited about the currency while it's trading within familiar ranges. Some support is expected around 0.4900, but a break below last week's 0.4895 low will suggest the downtrend is gaining traction. We suspect bounces will be limited to 0.5050-0.5075 region today.
There is no data due out of NZ today. However, across the Tasman, the NAB Business Survey for February will provide an update on the state of the Australian economy. Any sign that the Australian economy is deteriorating at a sharper than expected pace may put upward pressure on NZD/AUD.
As officials worldwide crank up for this weekend's G20 meeting in London, we suspect it will be a busy week in terms of media sound bites on the global recession and financial crisis. However, the key event for the NZD this week will be the RBNZ decision on Thursday. While the RBA left rates "˜on-hold' last week, the RBNZ has expressed deep concern about the impact of the global recession and so we are comfortable looking for a 50bps cut this week.
The USD strengthened against the major currencies last night as renewed fears about the global recession and the financial sector encouraged safe-haven demand.
In a report prepared for the upcoming G20 meeting, the World Bank has forecast the global economy will shrink "for the first time since World War II, with growth at least 5 percentage points below potential". It also warned that industrial production would fall by 15% by mid year, and international trade was on track to record its largest decline in 80 years.
Fears about the UK financial sector resurfaced last night, driving GBP/USD from above 1.4100 to below 1.3750. Moody's revised the credit outlook for HSBC to negative from stable and downgraded the financial strength outlook for Lloyds to "˜C+' from "˜B'. The ratings revisions come just days after Lloyds announced that the UK government had agreed to underwrite £250b worth of assets.
Against the backdrop of a generally firmer USD, EUR/USD slipped from above 1.2700 to nearly 1.2550. EUR was hit hard by comments from various Eurozone officials expressing a seeming reluctance to take additional steps to stimulate growth. ECB council member Stark warned that cutting interest rates too low may exacerbate the financial turmoil. Meanwhile, German Finance Minister Steinbrueck said Germany is "not discussing any additional measures" to boost the economy.
With interest rates in the major economies starting to converge, relative growth prospects (and the measures taken by policymakers in order to promote economic growth) have become increasingly important for driving currencies.
Germany's stimulus measures in 2009 are estimated at around 1.5% of GDP (which is more than double that passed in France), but this pales in comparison to economies like the US, China, Saudi Arabia and Australia where fiscal spending is on track to reach 2% of GDP this year. With the ECB's seeming reluctance to cut interest rates over the past few months threatening to prolong the Eurozone recession, and the lack of a single EU-Treasury making unconventional stimulus measures challenging, we suspect the EUR will continue to struggle over the coming weeks.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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