By BNZ Currency Strategist Danica Hampton
The NZD/USD has slipped lower over the past 24 hours. After climbing to nearly 0.6850 yesterday morning, the NZD/USD skidded to around 0.6650 last night.
While the Freddie Mac and Fannie Mae bail-out package bolstered global equities last night, market participants were quick to realise it would not solve all of the problems facing the global economy. As fears about a global slow-down resurfaced the USD found broad-based support "“ EUR/USD sank below 1.4100 for the first time since September 2007 - and another wave of JPY cross selling remerged.
The combination of a firmer USD and heavy NZD/JPY supply took a toll on NZD/USD. NZD/JPY fell from above 74.50 yesterday morning to below 72.00 last night and NZD/USD was dragged down to 0.6650.
Yesterday's NZ data wasn't too inspiring. Construction activity slumped 5.8% in Q2, which saw our economists to revise down their Q2 GDP forecasts to -0.3%q/q from -0.2%. Next clues on Q2 GDP will come from tomorrow's terms of trade and next week's manufacturing data.
However, Thursday's RBNZ monetary policy decision is really the key local focus. The central bank is widely expected to cut 25bps to 7.75% and so market participants will focus on the tone of the accompanying statement. While the RBNZ may not go quite as far as to justify the 6.50% trough in the OCR currently priced into the market, we suspect the tone of the statement will likely be close enough to not cause too much of a stir.
While changes in global growth expectations will continue to influence the NZD/USD, we look for the local currency to consolidate within familiar ranges in the lead up to Thursday's RBNZ decision. Initial support is seen around 0.6640-0.6650 and it will take a break below last week's low of 0.6590 to suggest the downtrend is gaining traction again. On the topside, expect the currency to face headwinds towards the 0.6750-0.6760 region.
The USD edged higher against most of the major currencies last night as markets concluded the Freddie Mac and Fannie Mae bail-out package would not solve all the problems vexing the global economy.
Equities markets in Asia and Europe rebounded strongly (the Nikkei climbed 3.38%, the DAX 2.0% and the FTSE finished up 3.92%) amid hopes the bail-out package would provide some support for beleaguered financial markets. While the S&P500 surged more than 2.5% on the open, the gains petered out as the night progressed. Shares in both Freddie Mac and Fannie Mae plunged more than 80% and market participants are starting to doubt whether the latest bailout will package provide any meaningful boost to investor confidence or support to the financial sector.
As worries about the global economy started to resurface, currencies struggled to maintain the highs reached during yesterday's Asian session as broad-based USD strength and selling of JPY crosses re-emerged.
After climbing above 1.4400 yesterday morning, heavy supply from Eastern European accounts (rumoured to be related to RUB intervention) and another wave of EUR/JPY selling saw EUR/USD slip steadily to below 1.4100 "“ its lowest level since September 2007. And the USD index climbed to a one year high of 79.75.
Soft UK PPI data added to downward pressure on GBP/USD. Core output prices climbed just 6.4%y/y in August, softer than 6.6% forecast. GBP/USD sank from around 1.7975 yesterday morning to below 1.7500.
With investors still worried about the health of the global economy, currency markets are likely take their cues from equity and commodity markets again this week. Despite the recent bail-out package, our risk appetite index (which has a scale of 0-100%) slipped to 44% last night from yesterday's 45% (well below last week's high of 53%).
Against a backdrop of slowing global growth and risk aversion, we'd expect to see "˜safe-haven' currencies like JPY, CHF and USD outperform, particularly against growth sensitive currencies like AUD and NZD. Consequently, we suspect bounces in USD/JPY will be limited to 109.00 and look for EUR/USD to break below 1.4000 in coming sessions.
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