By BNZ Currency Strategist Danica Hampton
The NZD/USD slipped lower last night, as risk aversion and fears about the global banking sector escalated.
GBP/USD led the move lower last night as the UK banking sector was in the spot light. Any optimism spilling from the UK government's new banking bailout package (which extends government guarantees and will set up a fund to buy bad debt) was quickly overshadowed by RBS, who warned that it was on track to rack up a loss of GBP28b in 2008.
But the bad news wasn't just limited to the UK. Standard & Poor's also cut Spain's sovereign debt rating to "AA+" from "AAA" and the European Commission cut its Eurozone GDP forecasts for 2009 to just -1.9%. Heavy losses in financial stocks and concern about the global outlook saw the FTSE fall 1%, the DAX drop 1.15% and S&P500 futures fall 1.12%.
Renewed fears about the banking sector saw most currencies skid lower as investors fled for the relative safety of the USD and JPY. NZD was no exception. A mix of short-term speculative accounts and more macro-driven funds have shown an interest to sell NZD and NZD/USD slid from around 0.5530 to below 0.5420.
Locally, keep an eye out for today's Q4 CPI release. We expect headline CPI to fall 0.1%q/q (vs. market consensus of -0.4%q/q) taking the annual rate down to 3.8% (well down on Q3's 5.1%). Dissipating inflation pressures should allow the RBNZ to cut rates aggressively (market pricing is consistent with 100bps to 4.00%) at its next meeting on January 29.
Over the coming week, we suspect the combination of a deteriorating global outlook and soft local data will ensure bounces in NZD/USD are limited. For today, we suspect the topside will be limited by 0.5500. On the downside, initial support is seen around 0.5390-0.5400, but a push towards last week's 0.5280 low looks likely in coming sessions.
Fears about the financial sector dominated markets last night and risk aversion saw most currencies weaken against the USD and the JPY.
GBP/USD led the move lower; falling from above 1.4900 to below 1.4500, after a raft of news highlighted the vulnerabilities of the UK banking sector. The UK government announced a new bank bailout package. Under the agreement, the UK government will extend its guarantees on debt and set up a GBP50b fund to buy toxic debt off banks. However, the new bailout package failed to inspire much confidence.
Instead, investors focused on the Royal Bank of Scotland (RBS). RBS shares fell nearly 70% after it announced it was on course to report a 2008 loss of up GBP28b, the biggest losses in UK corporate history. Other UK banking stocks also tumbled; shares in Lloyds Banking Group fell 34% on the first trading day after last week's HBOS takeover. The FTSE sank 1%, the German DAX fell 1.15% and S&P500 futures are currently down 1.12%.
EUR/USD dropped from above 1.3350 to below 1.3150 last night. Sentiment towards the EUR was also dented by a ratings downgrade on Spain and some grim economic forecasts from the European Commission.
Standard & Poor's cut Spain's sovereign debt rating to "AA+" down from "AAA" and warned about a severe deterioration in public finances. The European Commission cut its forecasts for the Eurozone economy to -1.9% in 2009 and 0.4% in 2010. These forecasts are more pessimistic than the ECB's, who in December forecast a contraction in the Eurozone economy of between 0 and -1% in 2009.
US markets were closed last night (for Martin Luther King Day) and when they open tonight the focus will be on President-elect Obama's inauguration. While the swearing in of a new US President may inject a bit of "feel good" factor into markets, any rebound in confidence will likely be short-lived.
There's a slew of US corporate earnings reports scheduled for this week and these are unlikely to inspire confidence about 2009. This week's Chinese data (including GDP, industrial production and retail sales) should provide vital clues on the outlook for global growth and commodity prices. And of course keep an eye out for tonight's Germany ZEW survey and UK inflation.
We suspect renewed fears about the global recession and concern about the health of the financial sector will underpin the USD and JPY again this week.
* 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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