By BNZ Currency Strategist Danica Hampton
NZD/USD skidded sharply last night, from nearly 0.5400 to below 0.5250, as global equities slumped and yesterday's risk appetite swiftly disappeared.
US Treasury Secretary Geithner unveiled a revamped US bank bailout plan last night, but it was not the "quick fix" investors were hoping for to mend the troubled financial sector. The plan will create a "bad bank" to buy US$500b of toxic assets from banks and will extend the Fed's program to support consumer and small business lending to about US$1t. Geithner also warned the new bailout plan will have to adapt to changes, will cost money, will involve risk and the financial crisis will "take a lot of time to resolve".
Markets were disappointed by the revamped bank bailout plan and Geithner's frank remarks. Heavy losses in financial stocks saw US equity markets slump; the S&P500 is currently down 4.25%.
In currency markets, sharply weaker equities and risk aversion saw investors ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and the JPY. NZD/JPY dived from above 49.00 to below 47.50 and NZD/USD skidded below 0.5250.
Looking ahead, the global backdrop will likely remain the key driver of NZD/USD this week. The obvious disappointment with the revamped US bank bailout package has seen risk appetite erode quickly, which combined with weak equity markets will keep the NZD/USD heavy.
For today, we expect bounces to be limited to the 0.5300-0.5320 region. Some support is expected ahead of 0.5150, but the risks are building in favour of a deeper correction back towards 0.5000 in coming sessions.
Today's Electronic Card Data will likely provide the first hint at how household spending shaped up in January, while Friday's retail sales report should provide a more detailed picture on spending in the last quarter of 2008.
The USD and JPY firmed against most of the other major currencies last night, amid renewed "safe-haven" demand after the new US bank bailout plan was unveiled and investors realised there was no "quick fix" for the problems facing the financial sector.
Treasury Secretary Geithner unveiled details of the revamped US bank bailout package called the "Financial Stability Plan" last night. Under the plan, a "bad bank" will be created to cleanse about US$500b of toxic assets from banks' balance sheets "“ while it will be seeded with government funds it may also involve private investment. The Fed will also expand its program to support consumer and small business lending, from its current US$200b to about US$1t. Geithner also delivered a healthy dose of reality on the financial crisis by saying "it's going to take a lot of time to resolve" and warning that "the government cannot solve it alone".
Geithner's honesty proved a bit much for markets and investors criticised the plan as incomplete and lacking detail. It soon became apparent the revamped plan would not be the "quick fix" markets had hoped for. Heavy losses in financial stocks weighed heavily in US equity indices. The S&P500 is currently down 4.25%.
In currency markets, the slump in equities and swiftly dissipating risk appetite saw investors ditch currencies in favour of the relative safety of USD and JPY. Heavy selling of JPY crosses (like NZD/JPY and EUR/JPY) saw USD/JPY slip from above 91.40 to below 90.40. EUR/USD skidded from above 1.3050 to below 1.2900.
Elsewhere in the world, the UK trade deficit narrowed to GBP3,611m (vs. GBP4,250m forecast) largely thanks to waning UK demand for imports. Russia refuted claims that it was planning to restructure/delay debt payments (rumours about this circulated through yesterday's Asian session) and ratings agency Fitch warned that Mexico's economic contraction and currency intervention were a threat to its sovereign debt rating.
Looking ahead, we expect risk appetite and equity market performance will continue to be the key driver of currencies this week. While the Senate has approved Obama's US$838b stimulus bill, the obvious disappointment over the revamped bank bailout package will likely keep equity markets defensive. As such, we suspect "safe-haven" demand will keep both the USD and JPY firm in the near-term. We suspect bounces in EUR/USD to be limited to 1.3100 and look for a slide back towards 1.2700-1.2750 in coming sessions.
* 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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