Opinion: $NZ rebounds after encouraging signs from global equities

By BNZ Currency Strategist Danica Hampton NZD NZD/USD traded choppily within a 0.5900-0.6350 range last week, as market participants tried to digest the slew of government rescue packages, the wild swings in equity markets and what it all meant for global growth. The volatility continued on Friday night. NZD/USD pushed up towards 0.6200 after very weak US data (the University of Michigan consumer confidence index fell to 57.5 from 70.3 in September and housing starts fell to a 17½ -year low) prompted a bout of USD selling. But fears about a global recession and selling from longer-term real-money accounts helped limit the gains. Closer to home, the NZ government appear to be making some positive steps on extending the government guarantees to bring it more into line with the guarantees in place across the Tasman. However, the big focus this week will be the RBNZ decision on Thursday. Market pricing is consistent with the RBNZ cutting 100bps this week, but we'd caution against getting overly hung up about exactly how much the RBNZ moves this week. The more important message is that the OCR will move substantially lower over the next year (we have a trough of 5.25% pencilled in for 2009). Looking forward, the worldwide measures to shore up the banking sector are encouraging, and the stabilisation in global equity markets has helped NZD/USD rebound off its lows. But uncertainty still abounds. While a sustained improvement in risk appetite and global equity market confidence has the potential to see the NZD/USD extend its gains in the near-term, we think bounces will be limited to the 0.6350-0.6400 region. After all, the recently announced official measures are unlikely to stave off a global recession, which combined with a sharply slowing NZ economy, further RBNZ interest rates cuts and falling NZ commodity prices will likely see the NZD/USD trend lower in coming months. Majors Last week was characterised by global uncertainty and extreme volatility across all asset classes, and Friday night was no different. US stock markets swung wildly and JPY crosses tended to mirror the stock market moves. Meanwhile, fears about a global recession tended to underpin the USD as investors sought the relative safety of USD denominated assets. On Friday night, an economic report showing that US housing starts fell to a 17 ½ year low last month added to the gloom surrounding the US housing sector. A steep drop in the University of Michigan consumer confidence index (it plunged to 57.5 from 70.3 in September) sparked worries about retail spending and domestic demand going forward. While the S&P500 finished Friday night down 0.6%, it ended up 4.59% for the week. Weak US housing data and rising crude oil prices saw EUR/USD climb early in the session, but heavy selling reportedly from corporates and Eastern European sovereign accounts meant the gains were limited to 1.3500. Meantime, ECB Chairman Trichet noted that while the Eurozone was slowing, everything was in place for economies to improve. The worldwide measures taken by various governments are relatively encouraging, but for the rebound in investor confidence to be sustained we'll need to see concrete evidence that the rescue efforts are actually working (i.e. the cost of inter bank lending continues to fall, banks actually receive the capital they need and credit markets show signs of functioning again). Nonetheless, while the measures undertaken by various governments should eventually shore up the financial sector, they are unlikely to prevent a global recession. Against a backdrop of slowing global growth, we'd expect investors to shift into more traditional markets and more traditional asset classes. And these repatriation flows are expected to benefit both the USD and JPY over the coming months. As market participants are now increasingly focused on the outlook for global growth, it will be worth keeping an eye on this week's economic data. Out of the US, Thursday's jobless claims should shed some light on the trend deterioration in the labour market. In the Eurozone, the PMIs for manufacturing and services sector (Friday) will likely be consistent with the Eurozone heading into recession in Q3. In the UK, Friday's first estimate of Q3 GDP will likely fall 0.3%q/q meaning the economy is technically in recession.