By Danica Hampton

NZD/USD rebounded off the fresh 6-year low reached on Monday, and spent most of the night within 0.4950-0.5020 range.

The RBA left rates unchanged at 3.25% yesterday. While acknowledging the weakness in the global economy, the RBA also noted that the Australian economy has not weakened as much as other economies. The RBA highlighted that "market and mortgage rates are at very low levels by historical standards" and will "provide significant support to domestic demand over the period ahead". At least for now, the RBA seems comfortable enough to sit back and assess how the fiscal stimulus and 400bps of easing already done flows through the economy. It's important to note, at this stage, this is just a pause in the RBA's easing cycle. If Australian growth remains soft and unemployment starts rising quickly, the RBA will cut again.

Yesterday's RBA decision raises the risk of the RBNZ taking a more measured approach to cutting rates when it meets next week. Given the NZ economic data remains very soft and has tended to disappoint expectations, we still expect the RBNZ to cut rates next week. However, we're now more likely to see a 50bps cut as opposed to 75bps. The tempering of RBNZ easing expectations lent a bit of support to NZD/USD last night.

Elsewhere overnight, equity markets remained fairly weak and this tended to zap a bit of appetite for growth sensitive currencies like NZD. The FTSE was the biggest loser - falling more than 3% - after a terrible UK construction PMI. However, UK Finance Minister Darling said everything was in place for the Bank of England to start quantitative easing. Fed Chairman Bernanke dashed any remaining optimism by painting a grim picture for US economic activity and warning a surge in government debt was inevitable.

There's a few things to keep an eye on today. In Australia, RBA Assistant Governor Edey is speaking (12:40pm NZ time). China's PMI (2:00pm) rebounded to 45.3 in January (its highest level since October), a further recovery may suggest the slow-down in China has stalled. And in NZ, the ANZ commodity price index (3:00pm) will likely fall (in both NZD and global price terms) and serve as a reminder that the slump in global demand is bad news for the NZ economy.

For today, the backdrop of weak global equities and risk aversion should ensure that bounces towards 0.5000-0.5020 attract sellers. On the downside, solid support is seen around 0.4910-0.4920.

The USD nudged higher against most of the major currencies last night, as investors digested the Bank of Canada rate cut, the possibility of UK quantitative easing and gloomy comments from Fed Chairman Bernanke.

As widely expected, the Bank of Canada cut rates by 50bps to 0.5% last night. However, USD/CAD surged to a three-month high of above 1.2950 as the accompanying statement hinted that that the central bank was considering unorthodox measures such as "credit and quantitative easing" to further stimulate the economy.

GBP/USD slipped from 1.4150 to below 1.4000, pressured by weak UK equities and worries about quantitative easing. Ongoing concern about the ailing UK banking system (in the wake of yesterday's GBP12.5b HSBS rights issue) and a terrible UK construction PMI (it fell to 27.8 in February well below forecasts of 34.2) saw the FTSE fall 3.1% last night. Meantime, UK Finance Minister Darling said the Bank of England could embark on quantitative easing as early as this week. Darling said "we've given them the levers" and "they may decide this month that it's appropriate to do so".

Fed Chairman Bernanke, in testimony to the Senate Banking Committee, gave a grim view of the US economic prospects and warned that labour market conditions had worsened in recent weeks. Bernanke told the committee that restoring stability to the battered financial sector was a prerequisite to a recovery from the deep US recession and said a surge in US government debt was unavoidable. Bernanke's gloomy comments, combined with lacklustre US data (pending home sales fell 7.7% in January vs. -3.5 forecast), weighed on US stock markets. The S&P500 is currently flat.

Ongoing weakness across global equities saw investors seek out the relative safety of the USD. EUR/USD slipped from nearly 1.2680 back towards 1.2520. Comments from ECB Council Member Noyer who said the ECB was looking at whether it needed to pursue "unconventional measures" may have added to the weight on EUR/USD.

Both the ECB and Bank of England have monetary policy decisions scheduled this week. The ECB is widely expected to cut 50bps to 1.50% on Thursday. Debate still reigns on whether or not the Bank of England will cut rates again this week, regardless the BoE is expected to signal that it's pursuing alternative measures like quantitative easing.

* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.