Opinion: NZ$ heads lower ahead of close election result

By BNZ Currency Strategist Danica Hampton The NZD/USD edged lower last night, falling from above 0.6000 to nearly 0.5900. Central banks took centre stage last night. The Bank of England shocked markets by cutting 150bps to 3.00% (markets were looking for a 50-100bps cut), the Swiss National Bank cut 50bps to 2.00% in an unscheduled meeting and the ECB cut 50bps to 3.25%. Despite the aggressive interest rate cuts, global equities plunged last night amid ongoing concern about a global recession. The IMF revised its 2009 forecasts for global growth down by 0.8% to 2.2% and warned that while government efforts were encouraging the "financial stress is likely to be deeper and more protracted then envisaged". Asian equities fell 3-7%, European equities fell 5-6% and the S&P500 closed down 5%. Early in the night, NZD/USD was dragged up above 0.6000 by broad-based USD selling. Market chatter suggests sovereign accounts were active USD sellers last night and some real-money demand was also noted in AUD/USD. However, the dramatic declines seen across global equity markets encouraged selling of growth sensitive currencies like NZD and NZD/USD was knocked back down to nearly 0.5900. It's difficult to get too excited about NZD/USD while it's trading within familiar ranges. For today, we suspect bounces above 0.6000 will attract sellers. Initial support is seen around 0.5900, but further losses in global equities have the potential to see NZD/USD push lower towards the 0.5800-0.5850 region. So what about Saturday's election? We don't think the differences between the macroeconomic policies of National and Labour are sufficiently different to produce any long-lasting effect on the NZD. However, we may see some knee-jerk NZD weakness if the election result is close and the leading party's leadership is reliant on a coalition with one of the minority parties. On other currency markets Central bank decisions were the main focus last night. However, the flurry of interest rate cuts were unable to prevent a sharp slide in global equity markets. The Bank of England surprised markets by cutting rates 150bps to 3.00% - the lowest level since May 1954. Most market commentators were looking for a 50bps cut, and a few (including NAB) were calling for 100bps. We suspect the BoE was responding to criticism it was "behind the curve" and has front-loaded the expected rate cuts. We doubt the MPC will cut again in December and January, but further rate cuts to at least 2.50% look likely early in 2009. In an unscheduled meeting, the Swiss National Bank also cut 50bps last night to 2.00%. The ECB cut rates by 50bps to 3.25% last night. After the Bank of England's extraordinary move, there had been hopes the ECB would also take more aggressive action. However, the ECB decided to meet market expectations. The ECB has now cut 100bps in just over a month and we suspect it would like to slow down the pace of its monetary policy easing and assess how the economy is responding. The accompanying statement left the door open to further rate cuts and we look for another 25bps easing in December. Despite the dramatic rate cuts, worries about a global recession (the IMF has revised down its forecasts for 2009 global growth by 0.8% to 2.2%) continued to pressure global equity markets. The Nikkei, Hang Seng and Kospi all dropped more than 6.5%. Despite European rate cuts, the FTSE fell 5.7% and the German DAX fell 6.8%. In the US, lacklustre retail sales (ICSC chain store sales fell -0.9%y/y in October) added to the gloom and the S&P500 is currently down 4.3%. Given the dramatic rate cuts and heavy losses in global equity markets, currencies were surprisingly stable last night (or perhaps we're just getting used to the wide ranges). The sharp slide in global equities kept the downward pressure on GBP/JPY and EUR/JPY, but USD selling (reportedly from sovereign accounts) helped slow the descent in GBP/USD and EUR/USD. Looking ahead, the outlook for global growth is dismal. German manufacturing orders fell -8.0% in September (vs. -2.3% forecast) highlighting the severity of the downturn in Europe's largest economy. And tonight's US non-farm payrolls is expected to show job losses of 200,000 in October. While markets are starting to respond to the worldwide policy efforts to shore up the financial sector, and the recent interest rate cuts are encouraging, these efforts will not prevent a global recession. Nor will unilateral currency intervention be sufficient to dislodge major currency trends. As such, EUR/USD and GBP/USD will likely remain under pressure and we look for a re-test of October's 1.2330 and 1.5270 lows in coming weeks. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.