Opinion: RBA and commodity prices the key to Kiwi$ today

By BNZ Currency Strategist Danica Hampton It's been a choppy night for the NZD/USD, which has spent the past 24 hours playing FX ping pong within a 0.5800-0.6000 range. On the one hand, last night's economic data painted a bleak picture of global growth. PMIs in the Eurozone and UK suggest manufacturing activity is contracting. The EU Commission revised down its UK GDP forecasts to -1.0% in 2009 and 0.4% in 2010. And the US manufacturing ISM dropped to 38.9 in October "“ its lowest level since September 1982. Heavy losses in EUR/USD and GBP/USD saw NZD/USD slip from above 0.5950 to around 0.5820. But on the other hand, demand for growth sensitive currencies has been bolstered by hopes a slew of interest rate cuts "“ including the Fed, Bank of Japan and China "“ would help prevent a deep and prolonged global recession. We've seen a stabilisation in global equity markets and investor confidence start to recover. A strong surge in AUD/USD through the NY session dragged NZD/USD back above 0.5950. Speculation about today's RBA monetary policy decision (4:30pm NZ time) kept the game interesting. The RBA is widely expected to cut 50bps to 5.50%, but an article (from noted RBA watcher Terry McCrann) suggests a 75bps rate cut is a possibility. Locally, keep an eye out for ANZ commodity price index (3:00pm NZ time), which will likely show another decline, in world price terms, on the back of further sharp falls in dairy prices. For today, uncertainty about the global outlook "“questions about how deep and prolonged the global recession will be and what this means for growth sensitive assets "“ will keep NZD/USD trading choppily. We expect the topside will be limited to the 0.5980-0.6000 region and see initial support around 0.5850. The USD edged higher against most of the major currencies last night. However, trading was thin with Japan closed for a holiday and many market participants content to sit on the sidelines ahead of the US Presidential election and the key events later in the week. EUR/USD and GBP/USD fell heavily last night weighed down by soft European data and speculation about aggressive rate cuts at this week's ECB and Bank of England meetings. EUR/USD slipped from around 1.2900 to below 1.2650 and GBP/USD fell from nearly 1.6400 to below 1.5800. The Eurozone manufacturing PMI slipped to 41.1 in October and the UK manufacturing PMI printed at 41.5"“ the sixth consecutive month below the 50 threshold that signals contraction. Meantime, the EU Commission has revised its forecasts for UK growth lower to -1.0% for 2009 and 0.4% for 2010. Both the ECB and Bank of England are expected to cut rates this week. The ECB is likely to trim rates by 50bps to 3.25%. However, there is a growing chorus of commentators calling for larger rate cuts in the UK. Our UK economists expect the Bank of England to cut 100bps to 3.50% this week (market expectations are centred on 50bps move). Across the Atlantic the economic news was just as sombre. The US manufacturing ISM was simply dreadful, it dropped to 38.9 in October from 43.5 in September. The latest reading was well below economists' expectations and marked the index's lowest point since September 1982. The soft data reignited fears about a US and global recession, which saw US equities erase their gains and prompted a bit of "˜safe-haven' demand for USD. The coming week is jam-packed full of event risk. In addition to the central bank decisions, we have the outcome of the US Presidential election and several key US data releases (including the services ISM on Thursday and non-farm payrolls on Friday). A dismal October has passed, but market participants are struggling to determine how long and deep the global economic slowdown will be. While further monetary policy easing is expected from the RBA, Bank of England and ECB this week, interest rate cuts will not be enough to prevent a global recession. Nor will unilateral currency intervention be sufficient to dislodge major currency trends. As such, we suspect global de-leveraging flows will 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.