By BNZ Markets economists

The start of the week for the NZD has seen global events drive sentiment. While the market eyes with more than just a passing interest preparations for the G20 meeting of national leaders there were various news items from both sides of the Atlantic that coloured traders' sentiment.

After pitching towards the US 58cent level late last week the NZD faded on a southward course as profit takers dominated the FX markets. As the NZD lost 200pts or so against the greenback, the EUR, GBP and AUD lost comparable amounts of ground as well as risk aversion crept higher, (the VIX up from the 40 level to 45.5 this morning). On the desk we've tended to see ongoing real money demand and Asian investor demand for the NZD, though for Monday at least these buyers have had the market come to them rather than them have to chase the currency higher.

Our economists wrote yesterday that overdone expectations of a recovery are stifling the chances of any rebound actually occurring this year. A rush to fix interest rates is putting immense upward pressure on wholesale rates, which is forcing local retail rates higher.

As a result the NZ dollar is being bid higher by international markets behaving as if a three-week bounce in equity markets, and a flood of cash, is a cure-all for the world's deep-seated economic and financial ills. These are steps too far, in theirs and our view. Our economists go on to say that they still favour the OCR falling to an eventual 2.00%, from its present 3.00%, with a good case of a fifty point cut in late-April. Indeed, the chances of this occurring have been reinforced by the upward moves in wholesale rates and the exchange rate.

Against a backdrop of a potentially firmer USD and ongoing global recession fears, we feel the NZD/USD will continue to struggle to break above last weeks' 0.5750/0.5800 highs and think the downside is a greater risk this week. Support has been seen overnight at the 0.5575/0.5600 level but a deeper pullback towards 0.5475/0.5500 is not out of the question.

Today the local market will focus on the National Bank business survey. February's survey looked extremely weak on all fronts, most notably with respect to employment and investment intentions, both of which we suspect will continue to look dreadful in the March update.

The recent lift in the NZD and general deterioration in the global outlook have only added to firms' woes, and we suspect survey signals of a mid-year recovery will be few and far between. The survey should be a sobering reality check for all those getting excited about economic and financial market turnaround. The survey is released at 3:00pm NZ time.

With the recent perverse tightening in NZ monetary conditions (the MCI has moved from -847 to -373 since the RBNZ MPS), many clients have been wondering what tools the RBNZ has available to re-exert more stimulatory conditions.

Well, first and foremost, it has plenty of orthodox powder left, in that it can keep cutting its cash rate, presently 3.00%. The Bank can also conventionally "jawbone" the curve, in signalling a very low cash rate for the foreseeable future. Shy of signalling a zero cash rate, however, the RBNZ might see the need to complement OCR cuts with either behind-the-scenes rebuilding of the NZD short position it has recently been trimming, or explicit selling of the NZ dollar in the markets.

Only if all of this doesn't ease monetary conditions sufficiently would the Bank, in our opinion, resort to quantitative easing of the sort now being administered by many other central banks.

As already mentioned risk appetite took it on the chin throughout the first 24 hours of the trading week.

News from Spain that authorities there will be spending up to EUR 9bio to rescue the regional bank CCM knocked EUR sentiment on our open yesterday and overnight there's little to cheer when German authorities are forced to take a stake in Hypo Real Estate Bank.

On the other side of the Atlantic the US Auto Taskforce rejected restructuring plans filed by GM and Chrysler and the GM CEO was forced to step down. Both have been given short time frames to show they can plan their own future or face losing government aid.