By BNZ Currency Strategist Danica Hampton

The NZD/USD was a bit of a side-show on Friday night, trading within 0.5880-0.5960 range, as market participants were distracted by the US non-farm payrolls release and weakness in EUR/USD.

December's non-farm payrolls dropped 524,000, in line with economist forecasts. However, steep downward revisions to the previous two months meant the unemployment rate surged to 7.2% (well above forecasts for 7.0%). Last week's soft data (in addition to payrolls we also saw awful data out of Europe and the UK) has nipped the New Year's optimism in the bud. The S&P500 fell 2.13% on Friday and finished the week 4.5% lower.

On Friday night, soft equity markets and renewed concern about the global outlook saw investors seek out the relative safely of USD and JPY. EUR was the biggest loser, as heavy selling of EUR/JPY and EUR/GBP took a toll. EUR/USD fell from nearly 1.3750 to below 1.3450. The combination of a broadly firmer USD and steady selling of NZD/JPY kept the downward pressure on NZD/USD.

Over the coming week, we continue to think the NZD/USD will struggle. Last week's string of weak global data provided a reality check on the New Year's optimism and reaffirmed that the global outlook for 2009 remains dismal. The key event this week will be ECB decision on Thursday, but there is also plenty of US data (namely retail sales, various manufacturing surveys, CPI and industrial production). Any further losses in global equities or commodity prices should see investors ditch growth sensitive currencies like NZD for the relative safely of USD and JPY.

This week's local data is also expected to highlight the dire state of the NZ economy. Tuesday brings the Quarterly Survey of Business Opinion (QSBO) which is likely to show a worsening of the local economic sentiment. We'll be keeping an eye on the labour market indicators for insights into the depths the local employment situation may reach over coming months. November's building consents are also released on Wednesday.

For the coming week, we expect NZD/USD will struggle above 0.6000. However, solid support is eyed ahead of 0.5800 and a break below this level is needed to suggest the downtrend is gaining traction again.

The USD firmed against most of the major currencies as investors amid December's weak non-farm payrolls report and soft global equities.

The 524,000 drop in December's non-farm payrolls was bang on analyst expectations. However, it was accompanied by huge downward revisions to the two previous months (October's payrolls now -423,000 from -320,000; November's now -584,000 from -533,000) and the unemployment rate surged to 7.2% (well above forecasts for 7.0%). Over the past year, nearly 2.6m Americans have lost jobs.

Last week's string of weak economic data provided a reality check and the New Year's optimism has worn off. The S&P500 fell 2.13% on Friday and finished the week 4.5% lower.

The EUR/USD was dragged lower by heavy selling of EUR/JPY as Wall Street was sent lower and risk appetite waned. Market commentaries note that reserve managers and Japanese accounts were sellers of EUR on Friday night. EUR/JPY plunged from above 1.2500 to below 1.2150 and EUR/GBP skidded from nearly 0.9050 to below 0.8850. EUR/USD slipped from around 1.3750 to below 1.3450 on Friday night and finished the week 3.3% lower.

Last week, currency markets were dominated by positioning unwinding as investors reassessed the outlook for 2009. EUR/USD suffered amid heavy unwinding of EUR/GBP longs (after a string of weak Eurozone data convinced markets parity was unlikely) and unwinding of EUR/JPY longs as the New Year optimism about the global outlook faded rapidly.

The key event this week will be the ECB decision on Thursday. The recent run of soft Eurozone data has heightened expectations that the ECB will cut 50bps to 2.00% and concern about the Eurozone outlook will likely keep EUR/USD defensive early this week.

It's worth noting, recent ECB rhetoric has been far from clear as to the ECB's intentions and a weekend article from the Financial Times suggests there is a good chance the ECB may not move at all this week. Should the ECB cut just 25bps or deliver "˜no change' decision, the knee-jerk reaction will likely see EUR/USD higher. But if investors feel the ECB's reluctance to take aggressive action will prolong the Eurozone recession, this will ultimately drag on EUR/USD.

There is also plenty of US data (namely retail sales, various manufacturing surveys, CPI and industrial production). Friday's US TIC data will also be of interest, as one factor that could undermine the USD in 2009 is waning appetite for USD denominated assets.

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