Opinion: NZ$ under pressure from Japan

By BNZ Currency Strategist Danica Hampton NZD/USD has spent most of the past 24 hours trading choppily within a 0.5450-0.5550 range. Steady selling out of Japan kept the NZD/USD under selling pressure through much of yesterday. Anecdote suggests these flows are a mix of uridashi maturities and generalised selling from retail accounts. However, some demand from model-driven accounts meant the downtrend failed to gather momentum and NZD/USD struggled to break convincingly below 0.5450. Overnight, we've been hit with a whole heap of news. The Chinese central bank cut its benchmark lending rate 108bps to 5.58%. The US data (durable goods, Chicago PMI, new home sales and University of Michigan consumer sentiment) suggests it's not just the Thanksgiving turkey that is stuffed. And despite the European Commission proposing a EUR200b stimulus plan, dovish comments council member Weber suggesting the ECB as "ample room" to cut rates saw EUR/USD skid from above 1.3050 to below 1.2850. While US equities opened lower, position squaring ahead of the Thanksgiving holiday saw stocks recover as the session progressed. The S&P500 is currently up 1.0% and this help push NZD/USD up above 0.5500. Today's NZ data should continue to tell a story of woe. October's trade deficit will likely widen further and the activity, investment and employment indicators in November's NBNZ business survey will likely be consistent with an extremely weak economy. All up, we expect today's data will be consistent with the RBNZ cutting rates at least 100bps next week. The deteriorating global backdrop, combined with the NZ recession and expectations of aggressive RBNZ rate cuts, should ensure bounces in NZD/USD are limited. For today, we suspect bounces towards 0.5550 will attract sellers. On the downside, initial support is seen around 0.5450, ahead of deeper support 0.5375-0.5400. It's been another choppy night for currencies as investors tried to digest the mix of dovish ECB rhetoric, poor US data and China's aggressive rate cut. Despite the European Commission proposing a EUR200b stimulus plan, the EUR weakened against most of the major currencies last night. German CPI fell to 1.5%y/y in November, below forecasts of 1.7% and well down on the 2.5% seen in October. ECB council member Weber said falling price pressures in the Eurozone has left "ample room" for the ECB to move on interest rates. He added the ECB will take advantage of this to stimulate the flagging European economy. However, with fellow ECB council member Smaghi saying the ECB didn't want to be the "cavalry in spaghetti westerns" - surrounded without any ammunition, a 50bps cut seems the most likely course of action at next week's meeting. Aggressive EUR selling was noted from both Middle Eastern and Eastern European accounts and EUR/USD slipped from above 1.3050 to around 1.2820. However, a bounce in US equities towards the end of the NY session helped lift EUR/USD off its lows. US stock markets opened lower, but despite the lacklustre US data managed to recover as the session progressed. However, the session appears to have been dominated by investors squaring up positions ahead of tonight's Thanksgiving holiday. The S&P500 is currently up 1.0%. Across the Atlantic, last night's US economic news was pretty dismal. Durable goods orders fell 6.2%m/m (well below forecasts for -3.0%) and the Chicago PMI slipped to 33.8 "“ its lowest level since 1982. New home sales fell 5.3% in October to 433,000 (well below forecasts of 441,000) and the University of Michigan consumer confidence index was finalised at 55.3 (slightly worse than the preliminary 57.5). Officials in China are clearly worried about the slowing Chinese economy and the PBOC cut the benchmark lending rate 108bps to 5.58%. The rate cut was the largest since the PBOC cut by 1.44% in October 1997 at the height of the Asian financial crisis. In the near-term, expect currencies to continue to take their cues from global equities. A strong close from US stock markets, combined with a positive reaction to the PBOC action could give Asian equities a boost today. However, given the dire state of the global economy and anticipated month-end demand for USD, we suspect EUR/USD will struggle to break above 1.3050. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.