By Danica Hampton The NZD has the dubious honour of being the worst performing currency over the past 24 hours, falling from above 0.5800 to below 0.5700. Yesterday's OECD report pulled no punches on its outlook for NZ. It highlighted the downside risks to NZ growth, NZ's sovereign credit rate and reinforced the need for further interest rate cuts. Specifically, the OECD look for GDP to contract 2.8% through calendar 2009 (quite a bit worse than our -1.6% pick) and it has a scant 0.5% "rebound" for 2010. The report also conveyed nervousness on the fiscal front, suggesting there is little, if any, room for any more stimulus. Clearly the limitations on fiscal policy put the onus on monetary policy and the OECD stated "monetary policy should be the primary tool used to provide further stimulus".
We've seen both the NZD and the NZ interest rates fall this week. NZ 2-year swap rates have fallen about 20bps to around 3.62%. 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. Overnight, China's GDP fell to its slowest pace in almost a decade and Eurozone industrial production fell 18.4%y/y "“ the biggest drop since the series began in 1986. Ongoing worries about the global outlook also encouraged investors ditch growth sensitive currencies like NZD in favour of the relative safety of the USD and JPY. For today, against a deteriorating global backdrop, we suspect NZD/USD will struggle towards 0.5750-0.5760. Some support is expected ahead of 0.5680, but the risks remain to the downside and deeper pull back towards 0.5550 looks likely in coming weeks. The USD firmed against the major currencies last night as lingering fears about the health of the global economy encouraged "˜safe-haven' demand. Recent economic data confirms the global economy is still struggling. China's GDP fell to 6.1% in the first quarter of 2009 (slightly below forecasts for 6.2%) "“ its slowest pace in almost a decade. Eurozone industrial production fell 18.4%y/y in February (vs. -18% forecast) "“ the biggest drop since the series began in 1986. The OECD suggests the Eurozone may contract as much as 4.1% this year and expects 30 of the main industrialised economies to be in recession by the end of 2009. The US data was equally lacklustre. March's housing starts fell 10.8% to 510,000 units and building permits dropped 9% to 513,000 units. A separate report showed that over 6 million Americans are now claiming unemployment benefits "“ a fresh record high. Despite the lacklustre economic data, global equities recorded modest gains. Financial stocks climbed after better than expected news from JP Morgan. JP Morgan reported earnings per share of 40 cents (above analyst forecasts of 30 cents) and said it was ready and able to pay back the US$25b received under the Fed's TARP program. Expectations of strong quarterly earnings also helped boost technology stocks. The FTSE rose 2.1%, the DAX rose 1.3% and the S&P500 is currently up 1.5%. Worries about the global outlook saw investors ditch growth sensitive currencies in favour of the relative safety of the USD and JPY. Currencies like the AUD and NZD were the biggest losers, but EUR and GBP were also under selling pressure last night. EUR/USD is currently hovering just above key support in the 1.3090-1.3100 region. A convincing break below this level will suggest a deeper correction towards 1.2800-1.2850 is on the cards. Comments from Kahn, the Head of the IMF, may have also helped support the USD. Kahn said there was no reason why the USD would lose its position as the primary global reserve currency and there were many reasons to believe the USD would play the same role after the crisis ends. The near-term fortunes of currencies will depend greatly on how global sentiment unfolds. Should investor confidence continue to unravel, we'd expect "˜safe-haven' demand to underpin the USD and weigh on JPY crosses like EUR/JPY. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.