NZ$ Up, but don't get too excited

By BNZ Currency Strategist Danica Hampton The NZD/USD has rebounded, from around 0.5400 yesterday morning to above 0.5600 last night. Hopes that central banks around the world will cut interest rates seemed to bolster investor confidence last night. Not only is Fed expected to cut rates 50bps this week, but the dovish comments from ECB officials suggest a European rate cut is likely in November. A recent Nikkei article, even suggests the Bank of Japan is thinking about cutting rates 25bps. A rebound in Asian equities paved the way for European and US markets to move higher last night. The Nikkei bounced 6.4%, the DAX climbed 11% and the S&P500 is currently up 5.6%. The combination of recovering equities, official demand for AUD and growing speculation the Bank of Japan will take measures to weaken the JPY has encouraged investors to take profits on short NZD positions. NZD/JPY has surged from below 50.00 to nearly 55.00 and NZD/USD has been dragged up above 0.5600. After the speed and magnitude of last week's descent in NZD/USD, some consolidation was likely. Indeed, the strong recovery in global equity markets and risk appetite has the potential to see NZD/USD extend gains in the near-term up towards 0.5780-0.5800. On the downside, we suspect dips will be limited to the 0.5740-0.5500 region. However, we'd caution against getting overly bullish towards the NZD/USD. The global economy is still headed for recession and this will ultimately be bad news for commodity exporting nations like NZ. A little stability returned to financial markets last night. Equity markets around the world staged a bit of a recovery and easing risk aversion helped relieve some of the downward pressure on the USD and JPY. A strong bounce in Asian equities paved the way for a recovery in European and US equities. The Nikkei bounced 6.4%, the DAX climbed 11% and the FTSE rose 1.9%. In the US, the S&P500 is currently up 5.6%. Investor confidence appears to have been boosted by hopes central banks around the world will cut interest rates. Not only is the Fed expected to cut 50bps when it meets this week, but increasingly dovish ECB rhetoric suggests a Eurozone cut is likely in November. Last night, ECB Council member Smaghi said the "ECB is not a strict inflation targeter". The Nikkei (a Japanese newspaper) reports the Bank of Japan is also considering cutting rates 25bps in order to support the domestic economy and weaken the JPY. The G7 and the Japanese government have expressed concern about the recent JPY strength and there is growing speculation the Japanese authorities will take firmer measures to weaken the JPY. The combination of a rebound in global equity markets, and the possibility that official action may undermine the JPY, was enough to encourage profit-taking on short JPY cross positions. Over the past 24 hours, EUR/JPY has climbed from below 114.50 to above 123.00 and USD/JPY has surged from around 92.50 to nearly 98.00. While we have seen a bit of a rebound in equity markets, there has been no improvement on the economic front. In the UK, the CBI Distributive Trade Survey painted a bleak picture of retailing, with retail sales volumes remaining unchanged at -27 in October. In the Eurozone, the French INSEE business survey showed the outlook for French industry is grim and French consumer confidence fell to -47 from -44 in September. Across the Atlantic, the Conference Board consumer confidence index fell to 38 in October, its lowest level on record. Meantime, the Richmond Fed manufacturing index tumbled to -26 (well down on September's -18) and the S&P/Case Schiller house price index fell 16.6%y/y in August "“ its biggest annual drop in the history of the index. In short, we think it's premature to conclude the world is suddenly a better place. We think worries about a global recession will continue to plague financial markets and suspect global de-leveraging flows will likely continue to support the USD and JPY. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.