Opinion: Further OCR cuts will not be as big; IMF kept busy

By BNZ Currency Strategist Danica Hampton The NZD/USD has spent most of the past 24 hours trading within a 0.5800-0.6000 range. The RBNZ cut interest rates 100bps to 6.50% yesterday. While the accompanying statement implied further rate cuts were likely in coming months, Bollard cautioned that future rate cuts may not be as large. The statement noted that the extent and timing of further easing would depend on domestic inflation pressures and developments in the global economy. Looking ahead, we expect another 50bps rate cut in December and the central bank to continue cutting until the OCR reaches 5.0% later in 2009. Interestingly, the NZD/USD actually bounced, from around 0.5820 to above 0.5950, after the announcement. As the 100bps rate cut disappointed the misguided fringe hoping for more aggressive action in the order of 150-200bps. Overnight, risk aversion and worries about a global recession remained the order of the day. Not only is growth looking dire in industrialised economies, but emerging economies are also under the hammer. Over the past two days, we've seen Argentina and Hungary take desperate measures to stabilise their equity and currency markets. Last night Brazil and Mexico intervened to support their currencies. Nonetheless, global equities remain under pressure and our risk appetite index (which has a scale of 0-100%) skidded to 5% -its lowest level since October 2002. In the near-term, fears about a global recession and risk aversion should continue to keep the downward pressure on growth sensitive currencies like NZD. For today, we suspect bounces will be limited to the 0.5980-0.6000 region. On the downside, solid support is seen around 0.5800, but a break below the October 8 low of 0.5785 will suggest the downtrend is gaining momentum again. Fears about a global recession and risk aversion dominated currency markets against last night. Against this backdrop, 'safe-haven' demand saw the USD and JPY strengthen against most of the major currencies. Former Fed Chairman Greenspan said "We are in the midst of a once-in-a century credit tsunami" and we are unlikely to avoid a "significant rise in layoffs and unemployment". UK retail sales fell 0.4%m/m in September bringing annual sales growth down to 1.8%y/y (vs. 2.0% forecast). And the Riksbank cut its benchmark interest rate 50bps to 3.75%. The economic picture is even uglier for emerging economies. Over the past two days, both Hungary and Argentina have taken desperate measures to stabilise their equity and currency markets. Last night, Brazil's central bank intervened to support the BRL and Mexico surprised the market by selling US$1b at a discounted price in order to support the MXN. S&P downgraded its outlook on Russia's sovereign credit ratings from "stable" to "negative". Several countries, including the Ukraine, Iceland, Hungary, Belarus and Pakistan, have been forced to seek help from the IMF in order to avoid national bankruptcy. These fears about a global recession have encouraged investors to bail out of risky assets into the relative safety of USD or JPY denominated assets. Global equity markets continued to slide last night. The Nikkei slipped 2.5%, the German DAX slid 1.1% and the S&P500 is currently down 4.2%. Our risk appetite (which has a scale of 0-100%) skidded to 5% last night "“its lowest level since October 2002. In currency markets, the backdrop of slowing global growth, falling equities and risk aversion has tended to underpin the USD and encourage selling of JPY crosses. Heavy selling of growth sensitive currencies against JPY has seen USD/JPY fall significantly this week, from above 102.00 on Monday to below 96.50 last night. GBP/USD has also been hit hard this week "“ pressured by Bank of England Governor King's admission the UK was probably in recession "“ falling from above 1.7500 on Monday to below 1.6050 last night. While the measures undertaken by various governments around the world should eventually shore up the financial sector, they are unlikely to prevent a global recession. Against a backdrop of slowing global growth, we expect investors to shift into more traditional markets and asset classes and these flows are expected to continue benefiting the USD and JPY over the coming months. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.