Opinion: BoE cut lifts Kiwi

By BNZ Currency Strategist Danica Hampton NZD/USD spent most of the night trading choppily within a 0.5800-0.5960 range. Through the first half of the night, investors were focused on weak equity markets and concerned about the outlook for global growth. Against this backdrop, growth sensitive currencies like NZD tended to under-perform as investors sought out the relative safety of USD and JPY. NZD selling was noted from a variety of short-term speculative players as well as real money accounts out of Asia. NZD/JPY slipped from above 54.50 to below 53.50 and NZD/USD was dragged down below 0.5820. But the NZD weakness proved to be short-lived. The Bank of England's 50bps rate cut and weak US data triggered a bout of USD selling and NZD/USD rebounded off its lows. The Bank of England's 50bps rate cut to 1.50% was in line with economist expectations. However, GBP/USD surged from 1.5050 to above 1.5350 after the decision as some traders were hoping for more aggressive action. The accompanying statement did nothing to change our view that the Bank of England is now preparing markets for a pause in the rate cutting process. Meantime, across the Atlantic, reports suggesting the US retailers have seen one of the worse holiday shopping seasons on record also weighed broadly on the USD. Market participants are now looking ahead to tonight's US non-farm payrolls. We suspect the countervailing forces of a weaker USD and soft global equities will keep NZD/USD range bound in the lead up to non-farm payrolls release. For today, we expect NZD/USD will struggle towards 0.6000. On the downside, solid support is expected on dips towards 0.5810-0.5820. The USD slipped against most of the major currencies last night amid soft equity markets, weak US data and the Bank of England's rate cut. Initially, renewed concern about the global outlook and weakness in Asian equity markets kept the downward pressure on risk sensitive currencies and USD/JPY. JPY crosses, like EUR/JPY and GBP/JPY, were knocked lower and USD/JPY fell from above 93.00 to below 91.00. The combination of EUR/JPY supply, and lacklustre Eurozone confidence data, saw EUR/USD slip from above 1.3650 to 1.3550. However, the Bank of England's 50bps rate cut and weak US data and encouraged a bout of USD selling and both EUR/USD and GBP/USD rebounded strongly off their lows. The Bank of England cut interest rates by 50bps to 1.50% last night. The accompanying statement said "the recent easing in monetary and fiscal policy, the substantial fall in sterling and the prospective decline in inflation would together provide a considerable stimulus to activity as the year progressed". While the decision was in line with economist forecasts, some traders were hoping for a more aggressive move and GBP/USD surged from below 1.5050 to above 1.5350 after the announcement. EUR/USD climbed from below 1.3550 to nearly 1.3800 as soft US data and renewed concern about the US economic outlook weighed broadly on the USD. Reports from US retail chain stores suggest it was one of the worst holiday shopping seasons in decades. ICSC Chain Store sales fell 1.7%y/y in December and many stores have lowered earnings forecasts for 2009. Weekly jobless claims rose by 467,000 (for the week ending January 4) and continuing claims now stand at 4,611,000. Market participants are now bracing themselves for tonight's US non-farm payrolls release for December. On average, economists are looking for a 523,000 decline in jobs, but forecasts range from -750,000 to -350,000. It's hard to know whether a weak US non-farm payrolls release will result in a bout of USD selling or whether it will renew concerns about the global outlook and result in selling of risk and growth sensitive currencies. So we'll be looking to equity markets for a barometer of investor sentiment. We'd expect heavy losses in US equities to trigger weakness in risk and growth sensitive currencies (rather than broad-based USD selling). * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.