Opinion: Kiwi hits 52 USc ahead of likely 150bp OCR cut

By BNZ Currency Strategist Danica Hampton After falling to nearly 0.5250 yesterday afternoon, the NZD/USD stabilised a bit last night as global equity markets clawed back gains. There wasn't too much in the way of news overnight. US Treasury Secretary Paulson said the US government was working on new programs and considering "less conventional" ways to stimulate the US economy. And the Bank of Japan widened the corporate debt it will accept in its money market operations in order to free-up funding for the corporate sector. Nonetheless, European and US equities rebounded 1.5-3.0% and this helped lift NZD/USD off its lows. The RBA cut rates 100bps to 4.25% yesterday. In its statement, the RBA acknowledged the downside risks posed by the global economy but also said monetary policy settings were now "expansionary". Having moved quickly to get monetary policy into expansionary territory, we now think the RBA will be comfortable enough to sit back and assess how the Australian economy unfolds "“ any further rate cuts from here will likely be at the margin. Attention is now firmly fixed on the RBNZ decision tomorrow. We believe 150bp is now likely, and certainly nothing less than three figures is being contemplated. The ECB and Bank of England are also expected to cut rates aggressively on Thursday night. It looks increasingly likely that this week's slew of interest rate cuts will be viewed as simply confirming the dire state of the global economy. While these global recession fears prevail, and global equities remain under pressures, expect NZD/USD to remain heavy. For today, we suspect bounces in NZD/USD will be limited to 0.5340-0.5350. Some support is seen ahead of 0.5250, but continued pressure on global equities will likely see NZD/USD retest of November's sub-0.5200 lows in coming sessions. After yesterday's dramatic sell-off in global equities and JPY crosses, we saw a bit of consolidation in both equity and currency markets last night. Global equity markets clawed back gains. European equities climbed 1.5-3.0% and the S&P500 is currently up 1.5%. While last night's recovery provides a little comfort, the wild swings we've seen over recent weeks simply underscore immense uncertainty about the economic outlook. While equity markets continue to look fragile, last night's rebound was enough to encourage a bit of profit-taking after yesterday's sharp slide in EUR/USD and GBP/USD. Some market commentary mentions demand from Asian and Middle Eastern central banks, which probably helped put a floor under EUR and GBP overnight. EUR/USD spent most of the night within 1.2550-1.2750 range and GBP/USD traded choppily between 1.4800-and 1.5050. In a speech, US Treasury Secretary Paulson said the US government was working on new programs and considering "less conventional" methods to stimulate the US economy. Paulson also expressed some frustration that banks were not making more funds available. Rumours suggesting Paulson may get another US$150b to inject into the banking system did the rounds last night. However, it's worth noting, Paulson has already used about half of the US$700b TARP funds (inject capital into banks, AIG, Freddie and Fannie etc) and he needs Congress approval before he can allocate the other half. The Bank of Japan held an emergency meeting yesterday and announced it will accept a wider range of corporate debt as collateral in its money market operations (in order to help corporates find funding). However, the cash rate was held steady at 0.3%. Market participants are now focused on the central bank meetings later in the week. The RBA cut 100bps yesterday and the RBNZ, BoE and ECB are scheduled to meet on Thursday. Market participants expect the Bank of England to cut 100bps to 2.00% and the ECB to cut 75bps to 2.75%. It looks increasingly likely this week's bevy of large interest rate cuts will be simply viewed as just another warning about the dire state of the global economy. While investors remain concerned about global recession, and global equities remain under pressure, expect deleveraging flows to continue to underpin USD and JPY. For EUR/USD, this suggests a visit to the recent lows of between 1.2300-1.2400 is likely before we see a significant rebound. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.