Opinion: NZ$ tumbles as traders doubt global recovery and US stocks slump

By Danica Hampton NZD/USD has fallen over the past 24 hours, sinking from nearly 0.7250 to below 0.7150. The global backdrop deteriorated last night following a string of lacklustre manufacturing data. China's PMI was a touch weaker than expected (rising to 54.3 vs. 55 forecast). The Eurozone PMI printed more or less on expectations, but the UK PMI fell to 49.5 (vs. 50.2 forecast). Meantime, in the US, the manufacturing ISM slipped to 52.6 from August's 52.9, well below forecasts of 54.0. Worries about the strength and timing of the anticipated global recovery had many investors questioning whether the recent equity market gains are sustainable. European equities fell 1.7-2.1% and the S&P500 is down about 2%. Measures of risk appetite also fell. The VIX Index (a commonly used indicator of risk aversion) spiked to a 1-month high of 28%. Our risk appetite index has fallen to 43%, after rising above its long-term average of 50% last week. Against a backdrop of falling equities and rising risk aversion, investors ditched growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. NZD/JPY skidded from above 65.00 to below 64.20 and NZD/USD was dragged below 0.7150. It hasn't all been one-way traffic in NZD, model-driven funds and short-term speculative players have been noted buyers of NZD at times over the past 24 hours. And a wide scattering of local-based real-money accounts have shown an appetite to pick up NZD on dips. The global outlook will be key to the fortunes of the NZD near-term. Investors have become quite optimistic on the global outlook over recent months, but are now starting to questioning whether or not this optimism is well-founded. Should tonight's US non-farm payrolls disappoint, a further reassessment of the anticipated global recovery may see the downward correction in global equities and risk sensitive currencies like NZD gather steam. For today, expect bounces in NZD/USD to be limited to 0.7200. Initial support is eyed around 0.7140, ahead of 0.7100-0.7110. The USD strengthened against all the major currencies last night, benefiting from "safe-haven" demand amid weak global data and soft equities. Early on, EUR/USD was pressured by comments from Eurogroup Chairman Almunia, who said the Eurogroup will discuss EUR appreciation to prepare for the upcoming G7 meeting. EUR/USD slipped from above 1.4650 to around 1.4520 and this paved the way for a generally firmer USD. "Safe-demand" provided further support to the USD as the night unfolded. A string of lacklustre manufacturing data helped reignite concerns about the global outlook and equity markets fell sharply worldwide. European indices fell 1.7-2.1%, while the S&P500 is currently down about 2%. The VIX Index (the implied volatility of the S&P500; commonly looked at as a measure of risk aversion) spiked to nearly 28% - its highest level in about a month. Falling equities and rising risk aversion encouraged investors to ditch currencies like EUR and GBP in favour of the relative safety of the USD. While yesterday's Tankan showed that Japanese manufacturers are becoming less pessimistic, they still expect to cut workers and production capacity. Meantime, China's PMI rose to just 54.3 in September a touch weaker than the 55.0 forecast. The Eurozone PMI printed largely on expectations at 49.3, but the unemployment rate rose to a 10-year high of 9.6%. The UK PMI fell to 49.5 in September, softer than the 50.2 forecast. Meantime, in the US, the manufacturing ISM slipped to 52.6 from August's 52.9, well below forecasts of 54.0. The detail of the report was also uninspiring and more than overshadowed the stronger-than-expected pending home sales (+6.4%mm vs. 1.0% forecast for August). With global equities rebounding some 50% from the lows seen in March, and many equity indices now looking stretched relative to valuations, investors are becoming less tolerant of softer-than-expected economic data. Many investors are starting to reassess the timing and strength of the anticipated global economic recovery and question whether recent equity market gains are sustainable. Further clues on the economic outlook will come from tonight's US non-farm payrolls release (where markets are expecting the US economy shed 175,000 jobs in September). If the economic news fails to justify the upbeat global outlook currently priced into markets, look out for a further correction across global equities and further USD gains. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.