Opinion: Kiwi falls below 59 USc after bad US, EU data

Opinion: Kiwi falls below 59 USc after bad US, EU data
Danica HamptonBy Danica Hampton NZD/USD fell last night, from nearly 0.6100 to below 0.5900, as disappointing US and Eurozone data had investors questioning the speed and strength of the anticipated global recovery. US retail sales fell 0.4%m/m in April, confounding forecasts for a flat result. Meantime, softer than expected Eurozone industrial production (-2%m/m vs. -1% forecast) suggests downside risks to already terrible forecasts for Eurozone Q1 GDP (due Friday). The worse than expected economic news saw equity markets dive "“ European markets fell 2-2.5% and the S&P500 is currently down 2.5%. The backdrop of renewed global concern, 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/JPY skidded from above 58.50 to nearly 56.50 and NZD/USD was dragged below 0.5900. Yesterday's RBNZ Financial Stability Report and related comments from Deputy Governor Spencer probably added to the weight on NZD. Spencer was reported as saying the recent currency strength is "not a permanent thing" and the currency "will revert to a downward trend". Today's Business NZ PMI is unlikely to paint a flattering picture of NZ's manufacturing sector (even if nudges up a littler it will likely remain at a contractionary sub-50 level). From a fundamental perspective, we think NZD/USD looks over-stretched above 0.6000 and if global sentiment continues to crumble we'd expect to see a deeper correction in NZD/USD. For today, we suspect bounces will be limited to 0.6030. Initial support is seen ahead of 0.5880 and a break below the 200-day moving average of 0.5850 is needed to suggest the downtrend is becoming entrenched. At times, it can be quite difficult to see the wood for the trees, particularly at the moment amid all the talk about global "green shoots". For an update of our medium-term NZD/USD view, refer to our recent publication "NZD/USD: 2009 Roadmap Revisited". The USD firmed against most major currencies last night as global equities skidded and investors reconsidered their upbeat view on the global recovery. Last night's economic data disappointed investors hoping for a rapid and robust global recovery. US retail sales fell 0.4%m/m in April, well below forecasts for flat result. And sales excluding automotive vehicles and parts weren't any better (-0.5%m/m vs. +0.2% forecast). Across the Atlantic, the economic data was also uninspiring. Eurozone industrial production fell 2.0%m/m in March (vs. -1.0% forecast) taking annual growth down to -20.2%. Economists are currently forecasting a 2.1% contraction in Eurozone Q1 GDP (due Friday), but weaker than expected industrial activity suggests downside risks to these already terrible forecasts. Investors (who have been getting accustomed to positive data surprises) were unimpressed by the data and global equities fell heavily. The DAX fell 2.6%, the FSTE dropped 2.1% and the S&P500 is currently down 2.5%. The backdrop of falling equities and rising risk aversion encouraged investors to flock to the relative safety of the USD and the JPY. After sinking to a fresh 4-month low of 81.90 yesterday afternoon, the USD Index climbed above 82.50 last night. Heavy selling of JPY crosses saw USD/JPY fall from above 96.60 to nearly 95.60 and EUR/USD dropped from above 1.3700 to below 1.3600. GBP/USD fell from above 1.5300 to below 1.5100, weighed down by the Bank of England's bleak Inflation Report. The Bank of England (BoE) expects UK economy to continue contracting in coming months, before eventually staging a slower than previously thought recovery in 2010. Inflation is forecast to fall to an annual pace of 0.5% and then gradually push up to around 1% over the next two years. The forecasts suggest interest rates will stay at their current very low level of 0.5% for a good while yet, and the report also left the door open to the central bank expanding its quantitative easing program. While some "green shoots" are evident in the global economy, we think equity markets and investors have become overly optimistic about the timing and strength of the global recovery. We are sceptical about equity markets' ability to hold on to recent gains. Any faltering in global equities and risk appetite should help support "˜safe-haven' currencies like the USD and JPY. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.

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