Opinion: NZ$ helped by Citigroup news, Obama's team

By BNZ Currency Strategist Danica Hampton NZD/USD extended its recovery last night, as global equities surged and investors welcomed new measures aimed at helping the global economy. The US government has put together a rescue plan for troubled US banking giant Citigroup (US$20b of capital injections and about US$300b of guarantees). President-elect Obama has instilled some confidence by announcing his new economics team and talking about a chunky fiscal spending plan. The UK government unveiled a GBP20b spending plan, which included slashing VAT from 17.5% to 15%. The German DAX surged 10.9%, the FTSE rose 9.9% and the S&P500 is currently up 5.1%. The strong rebound in global equities encouraged a bit of profit-taking on short USD and JPY positions. EUR/USD surged 2.5% from below 1.2600 to nearly 1.2900 and NZD/USD was dragged from yesterday's afternoon sub-0.5300 level to above 0.5450. A sustained recovery in global equities and risk appetite has the potential to squeeze NZD/USD back up towards 0.5600 in coming sessions. However, we're a bit skeptical about how long this Citigroup-inspired confidence will last. Indeed, even amped up fiscal spending won't prevent a global recession. The German IFO business climate index fell to a 16-year low last night suggesting the Eurozone recession will likely last well into 2009. And a global recession is bad news for commodity exporting nations like NZ. Local media report the NZ Treasury is preparing to slash its forecasts for NZ growth for the year ending March 2009, from 0.4% to nearly zero, thanks to the worsening global backdrop. Expect to see some signs of easing in the RBNZ and Marketscope inflation expectations (in line with recent falls in food and petrol prices) due out at 3:00pm. For today, the strong rebound in US equities should ensure bounces in NZD/USD are limited to the 0.5350 region. On the topside, expect some headwinds around 0.5475-0.5500. Global equities rebounded and the USD slipped against most of the major currencies last night as investors were encouraged by new measures aimed at shoring up confidence in the global economy. Global stock markets got a boost from a radical plan to save US banking giant Citigroup. The government will directly invest about US$20b into the bank and also guarantee about US$306b worth of loans and securities. After falling to nearly US$3.05 on Friday, Citigroup shares climbed more than 50% to above US$6.00. The S&P500 financial index climbed more than 10% and this saw the S&P500 rebound over 5.1%. President-elect Obama is working on a chunky fiscal spending package designed to help the ailing US economy and announced his new economics team. Timothy Geithner has been nominated as the new Treasury Secretary, Lawrence Summers as director of the National Economic Council, Melody Barnes as director of Domestic Policy Council and Christina Romer will chair the Council of Economic Advisers. Across the Atlantic, the UK government also released new measures to soften the harsh economic downturn. Chancellor of the Exchequer Darling unveiled a GBP20b fiscal stimulus package, which includes cutting VAT from 17.5% to 15%. However, it's worth noting, to fund the fiscal spending government borrowing will balloon to around 8% of GDP over the next financial year. The strong rebound in global equities reinvigorated risk appetite and encouraged some profit-taking on short USD and JPY positions. EUR/USD surged from below 1.2600 to nearly 1.2900, GBP/USD climbed from around 1.4850 to above 1.5150 and USD/JPY recovered from below 95.00 to above 96.50. While this optimism may last for a while yet (and currencies will continue taking cues from equity markets near-term), we'd caution against getting overly bullish and suspect EUR/USD will struggle above 1.3000. There is much scepticism about how long the Citigroup rescue-inspired confidence will last. And ultimately, despite the amped up fiscal spending, the global economy is headed for recession. The German IFO business climate index fell to 85.8 in November - its lowest level in 16 years - reinforcing concerns the Eurozone recession will last well into next year. Last night's US existing home sales fell 3.1% in October to just 4.98m (below 5.00m forecast) and the national median home price is now 11.3% lower than a year ago. Worries about a deep and prolonged global recession will likely continue to support the USD and JPY over coming months. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.