By Danica Hampton

While many are musing about rebounds, yesterday's seriously bad Quarterly Survey of Business Opinion (QSBO) likely woke everyone from their daydreams. The dire warnings for the NZ economy were widespread and detailed. Activity indicators were consistent with GDP slumping heavily in Q1 and Q2. Employment intentions were consistent with further heavy retrenchment and spare capacity is opening up at a stunning rate.

Yesterday's QSBO leaves us comfortable being on the 50 point side of the 25/50 point debate for the RBNZ's April meeting. We continue to look for an eventual trough in the OCR of 2.00%, which is lower than current market pricing. As the market comes around to our view of NZ monetary policy, we'd expect the downward pressure on NZ interest rates to also take a toll on the NZD.

NZD/USD slipped lower last night, amid weak global equities and steady NZD/AUD supply. Jitters about the upcoming corporate earnings season saw global equities fall for the second consecutive day. European equities fell 1-1.5% and the S&P500 is currently down 2.0%. Weak global equities encouraged investors to trim positions in growth sensitive currencies like NZD in favour of the relative safety of USD.

Steady NZD/AUD supply also helped weigh on NZD/USD. The RBA cut rates "just" 25bps to 3.00% (some investors had been hoping for a 50bps move) yesterday and media reports from noted RBA watchers suggest the RBA may be approaching the end of its easing cycle. The contrasting outlooks for RBNZ and RBA policy encouraged selling of NZD against AUD. Over the past 24 hours, NZD/AUD has slipped from above 0.8250 to below 0.8100.

For today, we suspect bounces in NZD/USD will be limited to the 0.5800 region. Initial support is seen around the overnight low of 0.5740, but the risks remain to the downside and a pull back towards 0.5550 looks likely in coming sessions.

The USD firmed against most of the major currencies last night, as global equities continued to fall and optimism towards the global economy faded.

Global equity markets fell for the second consecutive day as investors brace themselves for the Q1 corporate earnings season. Bloomberg polls show that analysts expect earnings across S&P500 companies to have fallen 37% in the first quarter of 2009. Undeniably, firms are feeling the pinch of the global recession and a report from Standard & Poor's revealed that Q1 was the worst quarter on record for US corporate dividends, which were cut by about US$77b. European stocks fell about 1-1.5% and the S&P500 is currently down 2.0%.

The continued descent in global equities and faltering risk appetite saw investors flock back to the relative safety of the USD. Against a generally firmer USD, EUR/USD skidded from above 1.3400 to below 1.3250. Data confirming the Eurozone economy had its worst ever quarter of GDP did little to help EUR sentiment. Q4 Eurozone GDP was finalised at -1.6%q/q, slightly worse than the preliminary reading of -1.5%.

Despite the deteriorating global backdrop, GBP/USD went sideways within a 1.4580-1.4775 range. GBP sentiment was helped by slightly better than expected UK data. Industrial production fell just 1.0% in February, not quite as bad as the 1.2% contraction forecast. However, it's still the twelfth straight month of contraction for the UK manufacturing sector and industrial production is still down 12.5% on a year earlier.

Policy makers around the world continue to take steps to help support the global economy. The RBA cut rates 25bps to 3.00% yesterday and left the door open to further modest easing in the coming months. The Bank of Japan left its policy rate unchanged at 0.1% yesterday, but it expanded the range of collateral it would accept in its money market operations to include loans on deeds to municipal governments. Japan's Prime Minister Aso is also expected to outline new stimulus measures this week, which could be worth up to 2% of Japanese GDP.

The fortunes of currencies this week will depend greatly on how global equity markets perform. Should equity markets continue to slide, we'd expect the USD to remain firm and risk sensitive currencies like JPY crosses to remain under pressure.

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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.