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Opinion: Kiwi$ slides to 72USc on global recovery worries, OCR decision (Update 1)

Opinion: Kiwi$ slides to 72USc on global recovery worries, OCR decision (Update 1)

By Danica Hampton After climbing above 0.7450 yesterday morning, the NZD/USD fell to below 0.7300 last night. It fell to 0.7214 in the minutes after a surprisingly 'dovish' OCR announcement this morning. (Updated to include move after OCR decision) Yesterday's Australian CPI was broadly in line with market expectations, but not strong enough to warrant a 50bps hike at the RBA's next meeting in November. After a short-lived bounce, the AUD/USD was sold heavily as investors scaled back the odds of aggressive RBA rate hikes near-term. The NZD/USD was dragged lower on the coat-tails of the AUD/USD. Overnight, worries about the global recovery continued to dominate currency markets. News that US financial services firm GMAC is trying to negotiate further government support and renewed concern about the European banking sector (the Irish "bad bank" plan has been delayed) took a toll on financial stocks. The S&P500 has fallen 1.5% overnight and it now down over 5% from last week's highs. The VIX index of S&P500 volatility (used as a proxy for risk aversion) surged to 26.6%, the highest level in nearly a month. The backdrop of falling equities and rising risk aversion saw investors ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. NZD selling has been noted from a range of short-term speculative players as well as real-money accounts over the past 24 hours. Locally, the key focus is on the RBNZ decision at 9:00am. We expect the central bank to acknowledge the improving news coming through "“ internally and globally. But this is only likely to see the RBNZ suggest hiking a little bit earlier than the late-2010 start-point it emphasised in its September MPS. We doubt the RBNZ will be hawkish enough to vindicate current market pricing "“ which is now consistent with the RBNZ hiking 25bps in January (and more than 200bps of tightening over the next 12 months). As such, today's RBNZ decision is unlikely to provide any support for the NZD. Overall, we continue to look for NZD/USD to trade with a heavier bias. We suspect bounces will be limited to 0.7350-7375. Initial support is seen ahead of 0.7250. Risk aversion and worries about the global recovery saw "safe-haven" demand support the USD and JPY last night. A slide across global equities, lead by heavy losses in the banking and energy sector, saw risk aversion sky-rocket last night. The VIX index of S&P500 volatility (used as a proxy for risk aversion) surged to 26.6%, the highest level in nearly a month. The financial sector has been weighted down by news that struggling US financial services firm GMAC has been in negotiations with the US Treasury for $US2.8b-US$5.6b of additional government support (on top of the $US12.5b already received). The S&P financials index is down almost 5%. The broader S&P500 fell a bit over 1% last night and is now down nearly 5% from last week's highs. European stocks have also been hit hard; the FTSE fell nearly 2.3% overnight and the DAX is down 2.5%. Lacklustre US data did little to shore up confidence. While US durable goods orders were bang in line with expectations (of a 1% increase), new home sales fell 3.6% in September, well below forecast for a 2.6% gain. Doubts about the strength and timing of the anticipated global recovery continue to take a toll on commodity prices. Oil prices slipped below US$78/barrel last night after data showed a surprisingly large pick-up in gasoline inventories. The broad CRB index of commodity prices is down nearly 2% and is down close to 4.5% over the past week. As doubts about the global recovery and risk aversion increased, investors flocked back into "safe-haven" currencies like USD and JPY. USD/JPY fell from 91.80 to around 90.70. "˜Growth sensitive' currencies like AUD, CAD and NZD bore most of the brunt of the unwind in risk appetite overnight. Despite yesterday's slightly stronger-than-expected September inflation data (+1% vs. 0.9% expected), AUD/USD has plummeted from above 91.50 to a smidge below 0.9000 over the past 24 hours. CAD surged to 1.078, the highest level in a month. Meanwhile, GBP managed to avoid most of the carnage, holding around 1.6400, thanks to yesterday's robust CBI October retail sales survey. Looking ahead, we suspect the USD will remain on a firm footing for the remainder. Recent economic news has tended to temper optimism about the global recovery and elicit "safe-haven" demand for USD. For today, we suspect bounces in EUR/USD will be limited to 1.4830-1.4850. A pull-back to at least 1.4650-1.4675 looks likely in coming sessions. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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