Opinion: Global growth fears push Kiwi$ lower

By Danica Hampton After starting the week just under 0.6800, NZD/USD skidded to around 0.6650 last night. Concern about the strength and timing of the anticipated global recovery has seen equity markets plunge worldwide. While last night's US Empire manufacturing data surprised on the upside, markets are still worried that US consumption will be insufficient to pull the US economy out of recession as quickly as expected. Japan's Q2 GDP was a touch worse than expected (0.9%q/q vs. 1.0% forecast) and investors fear a more tepid global recovery will be bad news for the export-dependent economies in Asia. The Shanghai index fell 5.8% and the Nikkei fell 3.1 "“ the worst one-day loss in about five months. European indices fell about 2% and the S&P500 is currently down 2.2%. Concern about the global economy also took a toll on commodities and risk appetite. The CRB Index, a broad measure of commodity prices, fell 1.5% last night and is now nearly 6% off the highs reached in early August. Our risk appetite index (where 0% = risk averse and 100% = risk loving) dropped nearly 6% to 40% last night. Escalating concern about the global backdrop saw investors ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. Heavy NZD selling has been seen from a wide variety of short-term speculative players and real-money accounts over the past 24 hours. However, it hasn't all been one-way traffic. Appetite for AUD and NZD has been noted from macro-driven funds at times. In the near-term, the global backdrop will be the key to the fortunes of the NZD/USD. While global growth expectations and risk appetite remain shaky, NZD/USD will remain vulnerable to a correction lower. For today, we suspect NZD/USD will struggle to break above 0.6740. Initial support is seen around 0.6645, but a break below this level will open up the downside towards 0.6590. The US dollar strengthened against most major currencies last night as investors remain jittery over the strength and timing of the global recovery. First up yesterday all eyes were on Asian equities, particularly given recent signs of weakness. As it turned out, it was another dour day. Chinese stocks fell a further 5.8% (bringing the weekly decline to 12%) while other Asian indices were similarly weak. Not surprisingly, investor confidence took another severe knock and this negative sentiment continued into the offshore session. Wall Street stocks are currently down 2 "“ 2.5%, and similar declines are evident across European equity markets. With investors reassessing the strength of global demand, particularly from China, the weakness in equity markets soon flowed into commodity markets. Prices for copper, zinc and aluminium traded on the Shanghai futures exchange all fell around 5%, while the CRB index (a broader measure of commodity prices) fell 1.5%. The sharp sell off in equities and commodities prompted a moderation in investor risk appetite, boosting demand for assets regarded as a "safe haven", such as the USD (ten-year US Treasury yields fell just under 10 bps). The USD strength was pretty much across the board (the only exception was against JPY). As a result, both EUR and GBP lost over a cent against the USD, in the case of the GBP to hit one-month lows around 1.4050. Meanwhile, the reassessment of global growth and weakness in commodity prices hit growth-sensitive currencies such as the AUD and NZD particularly hard, both of which were among the worst performing currencies overnight. It is important to note, investors still believe the world is in recovery mode. What appears to be changing however, is investors' expectations about just how quickly this recovery will occur. Japanese GDP data, released yesterday, served as a reminder of the improvement in global activity. Second quarter GDP rose 0.9%. This was a touch weaker than expectations of 1%, but was nevertheless indicative of the rapid improvement in economic conditions over the second half of this year. For today, we suspect the USD index will attempt to re-tested recent highs around 79.50. While investors remain jittery about the strength of the global outlook, risk appetite should remain contained for now, supporting the USD on dips towards 78.50. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.