Opinion: Kiwi dollar closely following global stocks

By BNZ Currency Strategist Danica Hampton NZD NZD/USD has traded choppily within a 0.5900-0.6200 range over the past 24 hours. The local currency sank to 0.5920 yesterday morning as escalating concern about a global recession saw equity markets crumble, commodity prices slide and investors bail out of risky currencies. However, the losses in NZD/USD proved to be short-lived. Heavy AUD and NZD demand, reportedly related to reserve manager diversification and profit-taking from model-driven accounts, saw NZD/USD rebound back towards 0.6200. Overnight, awful US manufacturing data (the Philadelphia Fed index plunged to an 18-year low and industrial production chalked up its largest monthly loss since 1984) reinforced concerns about a global recession. While news the Swiss National Bank was injecting capital into UBS and Hungary received an emergency loan from the ECB simply reminded us the financial strife is a global problem. However, US equity markets swung wildly "“ from gain to loss and back again "“ as investors struggled to digest the latest news, a day after Wall Street posted its worst daily loss since 1987. NZD/USD took its intra-session cues from fluctuations in the S&P500 and traded choppily within a 0.6000-0.6200 range. Uncertainty about the global outlook has created extreme volatility across all asset classes over recent weeks and NZD/USD has been no exception. In the near-term, while this uncertainty persists, expect NZD/USD to continue taking direction from global equities. For today, a positive close from US equity markets should ensure dips in NZD/USD are limited to 0.6000-0.6020. On the topside, initial headwinds are expected around 0.6200, but the currency has the potential to extend its gains towards 0.6250-0.6300 if we see a strong rebound in Asian equity markets today. Majors Despite worldwide efforts to stabilise financial markets, fears the global economy is headed for recession continue to reverberate around financial markets. These fears saw the USD climb against the EUR in choppy trade last night as investors sought the relative safety of USD denominated assets. US stocks swung wildly last night, as investors struggled to make sense of the latest news, a day after the market suffered its worst loss since 1987. While it was a volatile session in Asian equities (the Nikkei fell 11.4%), the volatility eased a bit through the European and US sessions. The FTSE finished down 5.35%, the DAX closed down 4.91% and the S&P500 is currently up 2.0%. In the US, promising signs on the inflation front (CPI grew 4.9%y/y in September down from August's 5.4%), were undermined by awful manufacturing data. The Philadelphia Fed index showed that factory activity plunged to an 18-year low in October, and industrial production posted its biggest monthly slide since 1984. Last night's lacklustre US data comes hot on the heels of yesterday's very soft US retail sales and Fed Chairman Bernanke's warning that the US economy was headed towards an extended period of difficulty. The news on the financial front wasn't particularly positive either. Citigroup reported a US$2.8b loss in Q3 and Merrill Lynch (that was sold to Bank of America last month) reported a US$5.1b Q3 loss. Meantime, news the Swiss National Bank was going to take a 10% stake in UBS and that Hungary had received an emergency loan from the ECB served as a reminder that the financial strife is also being felt across Europe. Vague rumours about the potential for further coordinated rate cuts, and flows reportedly related to reserve manager diversification, helped EUR/USD climb from 1.3350 to above 1.3500. However, sliding equities, falling commodity prices and risk aversion encouraged some EUR/JPY supply and this helped knock EUR/USD back down towards 1.3400. Looking forward, we suspect the USD and JPY will remain well supported over the coming months. 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. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.