By Danica Hampton
The NZD/USD has slipped a little lower over the past 24 hours and spent the night in a 0.4980-0.5050 range.
Yesterday's optimism proved fleeting and heavy losses were seen across global equities. Premier Wen quelled speculation that China was increasing its fiscal stimulus plan and GM warned that its survival was in "serious doubt". The FTSE fell 3.2%, the DAX dropped 5% and the S&P500 currently down 4.2%.
Meantime, the Bank of England cut rates 50bps to 0.50% and announced quantitative easing plans (it will start off by buying £75b worth of government bonds over the next three months). The ECB cut rates 50bps to 1.50% and left the door open for further cuts. In the accompanying press conference, ECB President Trichet didn't rule out alternative measures like quantitative easing, but its clear the US, UK and Japan are much further along in this process.
The central banks decisions, combined with the heavy losses across global equities markets, served to support the USD. Interestingly, the JPY also seemed to regain some of its "safe-haven" status last night. NZD/JPY slipped from above 50.00 to nearly 49.00 and NZD/USD was dragged back below 0.5000.
For today, the deteriorating global backdrop and "safe-haven" demand for USD and JPY should ensure bounces in NZD/USD are limited. We suspect NZD/USD will find headwinds on bounces towards 0.5080 ahead of tonight's US non-farm payrolls. On the downside, initial support is seen ahead of 0.4980, but a break below this level will open up the downside towards 0.4900-0.4910.
The USD firmed against all the major currencies last night, as equities around the world fell and the Bank of England and ECB cut interest rates.
Heavy losses were seen across global equity markets. Premier Wen disappointed investors by not announcing an increase to China's two year stimulus plan. While European and US stocks were hit hard by GM's warning that its survival was in "substantial doubt". GM, who have received about US$13.4b in government aid, said if it was unable to successfully reorganise it would be forced into bankruptcy. The FTSE fell 3.2%, the DAX dropped 5% and the S&P500 currently down 4.2%.
The weakness across global equities encouraged "safe-haven" demand for USD (and interestingly JPY seems to have regained some of its safe-haven lustre "“ USD/JPY fell from above 99.50 to nearly 98.03). European central banks decisions added to the weight on EUR/USD and GBP/USD.
The Bank of England cut rates 50bps to 0.5% last night and also announced steps to pump money into the economy by buying assets. The UK Treasury has given the central bank the authority to buy up to £150b worth of assets (of which £50b can be private assets). In the first instance, the Bank of England has announced it will buy £75b of assets over the next three months, predominately longer-dated UK government bonds.
As widely expected, the ECB cut 50bps to 1.50% last night. President Trichet left the door open to further rate cuts "“ but, just as well, given the ECB thinks Eurozone GDP will fall somewhere in the realms of -2.2% to -3.2% this year (that's worse than the IMF forecasts for the UK and US). In the accompanying press conference, Trichet did not rule out unconventional ways to stimulate growth, but its clear the US, US and Japan are much further along in this process. As a result, EUR slipped against not only the USD, but also the JPY and GBP last night.
With interest rates in the all 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. 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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