By Danica Hampton
Ed note (update 1): After opening in NZ, the NZD/USD nudged back above 63 USc. See live exchange rate charts here.
To borrow a phrase, "yesterday's ebullience has melted like spring snow", and across the board currencies have tumbled overnight. The NZD losing over 4% against the greenback and as its tendency when the exit door is rushed, it has lost ground on a number of cross rates.
The opening scene in last night's theatre was headlined by the ECB's Ewald Nowotny, with a downbeat assessment of 2009 & 2010 in the European region. He warned of large negative GDP outcomes throughout the region this year with growth flat lining next year.
Final GDP data for Q1 from EZ printed at -2.5%, which was -4.8% YOY to illustrate his outlook, though the Services PMI did improve marginally to 44.8 from a previous of 43.8 in May.
Currencies were already retreating when officials from India, South Korea and Japan were quoted as saying there is "no alternative to the US Dollar as main reserve currency", the show of unity and the over-extended short USD positioning accelerating the correction through the London day.
The MoF from Norway, Halvorsen, got his two ore in as well when commenting that the Norwegian "Government worried about the Krone gains". In the mix of news that helped turn sentiment, from left field, we can highlight a Latvian government debt auction that attracted no bids and prompted debate in the media of a devaluation, the country's PM quoted as fearing "a regional domino effect".
As we open this morning we are going to be part of the final act playing out on New York trading floors, with currencies still under pressure as a mix of leveraged accounts and momentum traders dominate activity and pare and cull their USD shorts.
We open this morning just above the USD 0.6275 level and would expect some local and real money appetite to slow the descent this morning. The price action from last night suggests that the 0.6375/0.6400 level will limit rallies, as the market takes stock of a fractious past few days and waits for the ECB and BOE to update their policy settings and views tonight.
At 3:00pm this afternoon we get the May update for ANZ's commodity price indices, Lifts in traded-currency prices for lamb, beef and dairy exports will likely be more than offset by the surge in the Kiwi during May, with a lower NZD index the not surprising result.
Yesterday the NZ Government published its accounts for April. As you'd expect (hope), the results were broadly in line with the new expectations as set out in last week's Budget. The underlying balance (OBERAC) was about as negative as expected, with the various debt measures also in keeping. The underlying tone of tax revenue certainly stayed negative. Even with the GST blip, the 3-months-to April 2009 tax take was down 14% on a year earlier. In the six months to April, corporate tax was down 40% y/y, which tells you where the most pain is. These falls are substantially worse than those seen during the 1998 recession.
Yesterday's news included Australian GDP, which surprised to the upside growing by 0.4% q/q. This means Australia was one of the few G10 countries to avoid a technical recession at the start of this year. The most obvious outcome from that news for locals has been a retreat lower in the NZDAUD exchange rate after a brief flirtation with the 80cent handle. Interestingly afterwards commentary from Treasurer Swan did not gloat on the outcome but was cautious and sanguine in his outlook.
Overnight the UK printed improved May Services PMI. The headline services index rose to 51.7, which was a much bigger jump than the market was expecting. It takes the index above the 50 'no change' level and it is at the highest level since March 2008.
As noted, the second estimate of Q1 GDP gave us the expenditure breakdown for the Eurozone. Although the quarterly fall was unchanged at 2.5%, revisions to back data meant that the annual growth rate was revised down from -4.6% to -4.8%. This will increase pressure on the ECB to ease policy further, which we expect them to do by implementing quantitative easing (QE) measures tomorrow.
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* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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