Opinion: Kiwi spends rough night on the choppy curren-seas

By BNZ Currency Strategist Danica Hampton For much of the night, NZD/USD has been under selling pressure as lingering fears about a global recession kept the USD and JPY well supported. Yesterday's Japanese GDP was finalised at -0.5%q/q for Q3, worse than -0.2% forecast. And the European data released overnight wasn't much better. The German ZEW business sentiment index fell to -45.2 (albeit a little better than -57.0 forecast) and the UK industrial production data was simply awful. The ECB's Constancio and Bank of England's Sentance both made fairly downbeat comments on the prospects for global growth in 2009. The Bank of Canada cut rates 75bps to 1.50% last night and formally acknowledged the economy is in recession. Against this global backdrop, most currencies struggled against the USD. NZD was no exception and after climbing above 0.5480 yesterday morning NZD/USD slipped to nearly 0.5360 last night. But sentiment changed suddenly. Heavy EUR demand at the London fix triggered violent squeeze and paved the way for a short bout of USD weakness. EUR/USD climbed sharply from 1.2800 to nearly 1.3000 and NZD/USD was dragged above 0.5450. However, losses in US equities (amid poor earnings outlooks and Sony's announcement it was cutting 4% of its workforce) helped knock the steam out of the bounce in NZD/USD. 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 by 0.5460. Initial support is likely around 0.5350-0.5360 (ahead of 0.5300). It was another choppy night in currency markets. During the first half of the night, the USD and JPY were generally firmer as fears about the global recession dominated. ECB Council Member Constancio warned the global recession would likely persist through 2009. Bank of England policymaker Sentance said the economic recession gripping the UK would likely be as long and deep as the previous three major post-war downturns. Ratings agencies S&P downgraded Russia's sovereign debt rating to BBB from BBB+. Although fairly pessimistic, the German ZEW business survey was not quite as bad as some had feared. The economic sentiment index fell to -45.2 (vs. -57.0 forecast) and the current situation index fell to -64.5 (vs. -60.0 forecast). However, data out of the UK was dismal. Industrial production fell 5.2%y/y (vs. -3.2% forecast) and manufacturing production fell 4.9% (vs. -3.2% forecast). Real-money accounts were noted sellers of EUR early in the night. EUR/JPY slipped from above 120.00 to below 118.50 and EUR/USD skidded from above 1.2900 to below 1.2800. But sentiment changed swiftly. Heavy corporate demand for EUR was reported at the London fix and this was enough to put a squeeze on short positions and pave the way for a bout of USD weakness. EUR/USD rebounded violently from around 1.2800 to nearly 1.3000. In other news overnight, the Bank of Canada cut interest rates 75bps to 1.50%. The accompanying statement was fairly downbeat; noting the global recession was broader and deeper than expected. Despite reports the bailout for US automakers is close to being finalised, US stocks slipped last night. Texas Instruments and FedEx both warned about the earnings outlook, while Sony announced it would cut 4% of its workforce. The S&P500 is currently down 1.1%. 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 gain traction 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.