By BNZ Currency Strategist Danica Hampton
The NZD/USD fell further last night, from above 0.5800 to nearly 0.5550, pressured by ongoing fears about a global recession and further losses in global equity markets.
The recession in the UK appears to be deepening - last night's night showed further weakening of the labour market and Governor King warned they "are prepared to cut rates to whatever level is necessary".
In the US, stock markets reacted negatively to US Treasury Secretary Paulson's redesigned US$700b bailout package. Instead of buying troubled mortgage assets, the plan will now try and free-up lending to US consumers. The FTSE fell 1.5%, the DAX fell 2.96% and the S&P500 is currently down 3.33%.
Against a backdrop of falling global equities and risk aversion, investors sold growth sensitive currencies like NZD in favour of the relative safely of USD and JPY. NZD/JPY skidded from around 57.00 to below 53.00 and NZD/USD was dragged down to nearly 0.5550.
However, both the AUD/USD and NZD/USD stabilised a little towards the end of the night. The RBA was seen buying AUD across the electronic platforms, which combined with sovereign demand for AUD, provided a bit of a prop for both AUD/USD and NZD/USD.
The outlook for global growth remains the key driver of NZD/USD. While we've had some positive news, there is still plenty to worry about. While this uncertainty about the global outlook persists, expect the NZD/USD to continue trading choppily taking its cues from global equities.
For today, the backdrop of soft equity markets should ensure bounces are limited to 0.5750. Solid support is expected on dips towards 0.5490-0.5500, but a re-test of October's 0.5350 low looks likely in coming sessions if the global backdrop continues to deteriorate.
Got a sense of déjà vu? Fears about the health of the global economy continue to dominate financial markets. Global equity markets are weak, risk aversion is rife and the USD and JPY have outperformed.
Stocks reacted negatively to news that US Treasury Secretary Paulson was shifting the focus of the US$700b rescue program. Instead of buying troubled mortgage assets, the plan will now pursue a broader campaign to bolster financial markets and free-up lending for consumer borrowing.
Troubling news from the retail sector added to the downward pressure. US retailer Best Buy said sales were likely to fell 5-15% over the coming quarter. The lacklustre outlook from Best Buy comes just days after its rival Circuit City filed for bankruptcy protection. Heavy losses were seen across global equity markets. The FTSE fell 1.5%, the German DAX fell 2.96% and the S&P500 is currently down 3.33%.
Risk aversion encouraged investors to bail out of growth sensitive currencies in favour of the relative safety of USD and JPY. EUR/JPY slipped from 123.50 to nearly 118.50 and EUR/USD was dragged below 1.2500. Heavy selling of JPY crosses saw USD/JPY sink from around 98.00 to 94.50.
GBP/USD fell to a 6-year low of 1.4896 amid fears about a deepening UK recession. Bank of England Governor King said policy makers "are prepared to cut bank rates to whatever level is necessary" to prevent a recession fuelling deflationary pressures. Last night's release of the Inflation Report noted that inflation may slow to "well below" its 2% target in 2009. Meantime, the ILO unemployment rate climbed to 5.8% (up from 5.7% last release) and the claimant count rose 36,500 its largest increase since December 1992.
While the dire UK outlook took a toll on GBP, some of the enthusiasm to sell GBP was tempered a little by official comments. Former Chancellor of the Exchequer Clarke warned that sharp declines in GBP could constrain monetary policy. While Governor King said a weaker GBP "can be a helpful part of the rebalancing provided it doesn't affect our ability to meet the inflation target".
In the near-term, expect currencies to continue taking their cues from global equity markets, but we suspect fears about a global recession and risk aversion will continue to underpin USD and JPY. As such, EUR/USD will likely remain under pressure and we look for a re-test of October's 1.2330 in coming sessions. Keep an eye out for tonight's Eurozone GDP release, which will likely confirm the region is in recession.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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