Opinion: Risk Kiwi$ will fall to 55 USc as NZ economic gloom deepens

By Danica Hampton The NZD/USD slipped further on Friday night, falling from around 0.5750 to nearly 0.5650. While global equities eked out modest gains, the USD made broad based gains after comments from ECB President Trichet and Swiss National Bank Chairman Roth weighed heavily on EUR and CHF. As EUR/USD slipped from above 1.3150 to nearly 1.3000, NZD/USD was also dragged lower. Heavy selling of NZD against AUD was also noted throughout the session. NZD/AUD skidded from above 0.7950 to below 0.7850 and this added to the weight on NZD/USD. Sentiment towards the NZ economy appears to be fading and nothing on this week's data calendar is likely to change that (March's Performance of Services Index is released today and credit card billings on Thursday). As such, we suspect bounces in NZD/USD will be limited and the downside remains the greater risk. Over the past week, we've seen quite a bit of downward pressure on NZ interest rates (partly a reflection of last week's downbeat OECD report and reduced demand for fixed rate hedging from corporates and domestic mortgage books). NZ 2-year swap rates have fallen about 20bps to around 3.65% and NZ-US 3-year swap spreads have narrowed 2.65% to 2.35%. However, we still think the market is underestimating the scope for further monetary policy easing. Current market pricing is consistent with about a 50% chance of a 50bps cut to 2.50% on April 30 and the OCR troughing somewhere between 2.25-2.50%. We continue to look for an eventual trough in the OCR of 2.00% and as the market comes into line with our view, we'd expect the downward pressure on NZ interest rates to also weigh on NZD/USD. For today, we suspect NZD/USD will struggle towards 0.5750. Some support is expected ahead of 0.5600, but the risks look skewed in favour of a pull-back towards 0.5500-0.5550 in coming sessions. The USD firmed against the major currencies on Friday night, despite modest gains across global equity markets. Global equities eked out modest gains on Friday. Citigroup announced a Q1 profit of US$1.6b and General Electric reported a 35% loss this was better than market expectations. It wasn't all good news. Shares in General Motors fell more than 4% after its CEO warned that bankruptcy remains an option for the car giant as it struggles to come up with a plan to get fresh US government aid. On Friday night, the FTSE rose 1.0%, the DAX rose 1.5% and the S&P500 rose 0.5%. The S&P500 has now risen for six consecutive weeks. Despite the rebound in global equities the USD stayed firm as EUR and CHF were pressured by comments from their respective central bankers. EUR/USD slipped from above 1.3150 to nearly 1.3000 after comments from ECB President Trichet made it clear that Eurozone interest rates could be cut to 1.00% next month. In a separate interview, Trichet also warned that the glimmers of hope seen in recent data shouldn't be over played and that 2009 would be a "very difficult year". Meantime, USD/CHF surged from 1.1550 to nearly 1.1700 after Swiss National Bank Chairman Roth warned that the SNB will intervene again if the CHF shows a tendency to strengthen. Worse than expected Swiss retail sales (dropped 3.8%m/m vs. -0.2% forecast) also helped weigh on CHF sentiment. The close relationship between equities and currencies seemed to break down last week. Corporate earnings tended to beat expectations and the S&P500 recorded its sixth consecutive weekly gain, which all else equal, would have tended to reduce "˜safe-haven' demand for currencies like USD. But escalating fears about economic growth elsewhere in the world escalated "“ particularly Europe where investors fear policy makers aren't doing enough to safe guard the Eurozone economy "“left the USD looking the best of a bad bunch. Keep an eye on this week's Eurozone data (including German IFO and Eurozone manufacturing data). Any sign that the Eurozone economy is deteriorating will likely add to the downward pressure on EUR/USD. There is plenty to watch out for this week. We have another run of corporate earnings this week (including US regional banks and tech giants), the US Treasury is due to reveal the "˜stress testing' methodology on Friday and the G20 meet this weekend in Washington. See all our charts here. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.