Opinion: BNZ still sees OCR falling to 3.5-4% despite Bollard inflation warning

By BNZ Currency Strategist Danica Hampton NZD/USD has spent most of the past 24 hours trading choppily within a 0.5380-0.5500 range. Overnight, a stabilisation in global equities and lingering concern about how the US government will fund its fiscal spending splurge saw the USD weaken broadly and this lent a bit of support to the local currency. Some market commentaries suggest a chunky NZD/GBP flow probably added to the bid tone early in the night. NZD/USD clambered off the 0.5380 low seen yesterday morning and climbed to around 0.5500 last night. In a speech yesterday, RBNZ Governor Bollard reminded us that further monetary policy easing is dependent on inflation pressures falling across the board. We are inclined to view the comments as a warning that all businesses need to do what they can to stimulate the economy, rather than telling us anything substantive about monetary policy. We expect the RBNZ will cut another 50bps to 4.50% in January and continue to think the OCR will trough somewhere between 3.50-4.00% later in 2009. While it's unlikely to cause much market reaction, keep an eye out for today's BNZ Business PMI due at 10:30am. We are expecting another miserable reading in line with the global rout that is taking place in this sector. While bigger picture we continue to see downside risks for the NZD/USD, expect the currency to take its near-term cues from global equities. Should we see further gains in global equities over the next few days, NZD/USD has the potential to be squeezed back up towards 0.5600. However, given the backdrop of slowing global growth and fragile risk appetite, the NZ recession and falling NZ interest rates, we continue to think bounces will attract sellers. For today, expect more choppy consolidation. We suspect the topside will be limited to 0.5500. And some support is expected in the 0.5360-0.5380 region. The USD weakened against most of the major currencies last night as global equity markets rebounded and investors remain concerned about how the US government will fund its fiscal spending promises. Global equity markets inched higher last night as US policymakers put the finishing touches on the rescue package for US automakers. There is plenty of criticism of the rescue package, with most debate centring on the fact that the three car companies will receive a bailout before making any material changes to their business strategies. Nonetheless, the Nikkei climbed 3.1%, European indices were more or less flat and the S&P500 is currently up 0.5%. The rebound in global equities provided some support for EUR and the break above 1.3000 triggered a wave of stop-loss buying. Reportedly, Middle Eastern names showed solid appetite for EUR, but real-money and corporate accounts remain persistent sellers. EUR/USD climbed from nearly 1.2900 to above 1.3050. Despite the moves seen in financial markets, last night's economic data suggests all is not well in the world. China's trade numbers dropped dramatically in November; exports fell 2.2%y/y (vs. +14.8% forecast) and imports dropped 17.9%y/y (vs. +12% forecast). The data highlights just how abruptly growth is slowing in the world's fourth largest economy. Mining company Rio Tinto announced it would cut 14,000 jobs and slash capital expenditure blaming "unprecedented rapidity of the global economic downturn". Industrial production data out of Europe was consistent with growth in the region remaining lacklustre over the coming months. Italian industrial production fell 6.7%y/y, Swedish industrial production fell 7.1% and French industrial production dropped 7.2%y/y. And across the Atlantic, US wholesale inventories fell 1.1%m/m in October (well below forecasts of -0.2%). It's possible that the recent slew of aggressive rate cuts and expectations of further government action to curb the US recession will see financial markets stabilise a bit in the lead up to Christmas. Should global equity markets recover, expect to see a bit of USD weakness and a rebound in EUR/USD. However, given the backdrop "“ where recent data has shown activity around the world is collapsing and unlikely to improve any time soon - we continue to think that fears about a global recession will mean any USD weakness is short-lived. As a result, we suspect EUR/USD will struggle to sustain bounces above 1.3000. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.