By BNZ Currency Strategist Danica Hampton
After climbing above 0.5300 yesterday afternoon, NZD/USD slipped to around 0.5160 last night.
While yesterday's mixed Australian employment report (employment growth was stronger than expected, but the unemployment rate rose to 4.8%) saw AUD/USD push above 0.6600, the AUD was sent reeling after the Australian Senate rejected it's A$42b stimulus package last night. An independent tied the vote, which came as shock to the market. AUD/USD skidded from above 0.6600 to below 0.6450, and NZD/USD dragged along for the ride.
Safe-haven demand for USD also helped keep the downward pressure on NZD/USD overnight. Global equities markets fell further last night amid lingering disappointment about the revamped US bank bailout plan. Soft Eurozone industrial production and a warning from Moody's that Ireland and Spain were the most vulnerable triple-A rated countries did little to help sentiment.
Locally, there is a lot to keep an eye on today. RBNZ Bollard has an "on the record" press conference scheduled for 8:30am. This will likely provide an update on NZ's current situation, but given senior officials at the RBNZ and Treasury have recently returned from a global tour we may also get an update on how badly the rest of the world is faring.
Later at 10:45am, retail sales volumes for Q4 and nominal sales for December will be released. Plunging car sales during the final months of 2008 will likely drag on total sales volumes for Q4 and we look for a drop of 0.3%q/q. We expect falling petrol prices will exert further downward pressure on December's nominal sales; we're expecting a drop of 1.5%m/m (ex auto -0.3%).
For today, we'd expect the slew of local news to weigh on NZD/USD first thing this morning. Initial support is seen ahead of 0.5150, but a break below this level would open up the downside towards 0.5020.
Beyond that, we expect NZD/USD will take direction from global equities and risk appetite. Don't be surprised if we see some position squaring ahead of the G7 meeting at the weekend. However, bounces are expected to be limited to the 0.5280-0.5300 region.
Safe-haven demand saw the USD firm against most of the major currencies last night, amid ongoing concern about the financial sector and soft global equities.
US Congress appear to have reached agreement on a US$789b stimulus package and the final vote is expected before the end of the week. However, disappointment over the lack of detail in the revamped US bank bailout bill continues to overshadow any positive fiscal news. Heavy losses in financial stocks continue to weigh on broader equity indices. The FTSE fell 0.8%, the DAX dropped 2.7% and the S&P500 is currently down 2.0%.
Last night's US data was a little mixed. US retail sales surprised on the upside (+1.0%m/m in January vs. -0.8% forecast), but jobless claims continued to rise (+623,000 last week vs. +610,000 forecast).
In currency markets, soft global equities and muted risk appetite encouraged investors to flock to the relative safety of the USD. At the margin, a Financial Times article reporting that China intends to continue buying US government bonds may have also provided a bit of support for the USD.
Against a generally firmer USD, EUR/USD slipped from around 1.2950 to below 1.2750. Eurozone industrial production also disappointed, falling 2.6%m/m in December (vs. -2.5% forecast). Eurozone GDP is released tonight and economists look for a 1.3% contraction in Q4. Ratings agency Moody's warning that Ireland and Spain are the most vulnerable "Aaa" nations may have also weighed on EUR.
GBP/USD skidded from around 1.4400 to below 1.4200 last night. Yesterday's comments from Bank of England Governor King, warning that "further easing in monetary policy may well be required", continues to weigh on GBP/USD. Comments from Moody's did little to help UK sentiment; Moody's affirmed the UK's stable "Aaa" rating but warned the economy faces considerable challenges to their debt positions.
The G7 meet over the weekend, the focus is expected to be on measures to promote financial stability and economic growth "“ rather than currencies. While we may see a bit of position squaring ahead of the weekend, risk appetite and equity market performance will likely remain the key driver of currencies. While risk appetite remains muted and global equities weak, expect "safe-haven" demand to continue to keep USD and JPY firm.
* 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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