Opinion: NZ$ rebounds on easing fears of global meltdown

By BNZ Currency Strategist Danica Hampton NZD/USD has rebounded over the past 24 hours. After slipping to nearly 0.5900 yesterday afternoon, the currency climbed above 0.6100 this morning. Fears about a global recession and the melt-down in financial markets eased a bit last night as officials stepped up measures to address the financial crisis. EU leaders have committed to taking a unified approach to bailing out the European banking sector, the UK government has accelerated its plan to nationalise the banking sector and the US Treasury has plans to inject capital directly into US banks. Meantime, major central banks have announced additional measures to boost liquidity in money markets and this should help reduce the pressures on inter bank lending rates. The S&P500 climbed 11.6%, the German DAX climbed 11.4% and the FTSE rebounded 8.26%. The rebound in global stock markets helped underpin demand for growth sensitive currencies like NZD, particularly against "˜safe-haven' currencies like JPY. NZD/JPY climbed from below 59.50 to above 61.50 and NZD/USD was dragged up towards 0.6100. The global optimism will likely spill across into Asian equity markets today and this will likely help underpin NZD/USD. For today, we suspect dips will be limited to the 0.5990-0.6000 region. While some headwinds are expected around the 0.6150 region, the currency has the potential to extend its gains towards up towards 0.6200-0.6250 in the coming sessions. 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 0.6400-0.6450 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. Stock markets around the world recovered last night after officials in the UK, Europe and the US stepped up measures to address the financial crisis. In the UK, the government has accelerated its planned partial nationalisation of the UK banking sector. It will invest GBP20b in RBS, GBP 11.5b in HBoS and GBP5.5b in Lloyds TSB. The government will also guarantee some bank and building society debt instruments (up to three-years in maturity). EU leaders have agreed to guarantee until the end of 2009 bank debt issuance with maturities up to five years. Governments in the Eurozone will be allowed to buy stakes in banks and there is a commitment to recapitalise systemically critical banks in distress. The US Treasury is also planning to take equity stakes in banks (as part of its US$700b banking rescue plan). The S&P500 ended its 8-day losing streak last night, climbing 8.12% - its largest daily gain since 1987. US equities were underpinned by strong gains in financial stocks. Investors were encouraged by the official measures and Morgan Stanley shares jumped as much as 75% after Japan's Mitsubishi UFJ Financial Group finalised its US$9b investment. Bargain hunters were also out in force, with the S&P500 ending last week with a price-to-earnings ratio of 17 "“ its cheapest valuation in more than a year. A similar recovery was seen in Europe, where the German DAX climbed 11.4% and the FTSE rebounded 8.26%. Major central banks (including the Fed, ECB, Bank of England and SNB) announced additional measures to boost liquidity in money markets. Effectively the Fed has expanded its lines with ECB, BoE and SNB so that an unlimited amount of USDs can be borrowed (at 7-day, 28-day, and 84-day maturities). With various governments guaranteeing bank liabilities and last night's additional liquidity measures, inter-bank lending rates look likely to fall in coming months. The rebound in global stock markets helped fuel demand for higher yielding currencies like AUD, NZD, EUR and GBP as investors regained some appetite for risk. GBP has clearly benefited from the UK's aggressive commitment to rescue the banking sector, climbing from below 1.7000 to above 1.7400 last night. While EUR/USD bounced strongly from below 1.3500 to above 1.3680 last night, real-money selling knocked EUR/USD from its highs. Looking ahead, for the rebound in GBP/USD and EUR/USD to be sustained, we'll need to see concrete evidence that the rescue efforts are actually working (i.e. the cost of inter banking lending starts to fall, banks receive the capital they need and credit markets show signs of functioning again) * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.