Opinion: Kiwi below 80 Aussie cents but further weakness unlikely

By Danica Hampton NZD/USD has slipped lower over the past 24 hours, from around 0.5850 yesterday morning to below 0.5750 last night. Overnight, fears about the global economy escalated. US industrial production contracted at a sharper than expected pace (-1.5%m/m vs. 0.3% forecast) and German wholesale prices chalked up the largest fall in 22 years (dropping 8%y/y vs. 7.1% forecast). UBS announced a US$1.7b loss for the first quarter of 2009 and global equities fell modestly. Lingering concerns about the global economy and risk aversion encouraged investors to ditch growth sensitive currencies like NZD in favour of the relative safety of the USD. Macro-driven funds and real-money accounts were also active sellers of NZD last night. Over the past 24 hours, NZD/AUD has fallen sharply from above 0.8100 to below 0.7980 "“ its lowest level in nearly a month. Some of this NZD/AUD weakness is attributable to the perceived fundamental differences between NZ and Australia. For example, the RBNZ is expected to cut rates at least 25bps on April 30 (and continue cutting in coming months), whereas the RBA is probably closer to the end of its easing cycle. While we agree the Australian economy is probably in better shape than the NZ economy, it is only at the margin. As such, we don't think the arguments for further dramatic NZD/AUD weakness are compelling. For today, against a deteriorating global backdrop, we suspect NZD/USD will struggle towards 0.5850. Some support is expected ahead of 0.5740, but the risks remain to the downside and deeper pull back towards 0.5550 looks likely in coming weeks. Keep an eye out for today's BNZ PMI (due 10:30am), which will provide an update on the state of the manufacturing sector and offer some guidance on whether a rebound in activity is likely in coming months. The USD remained firm against the major currencies last night as weak global equities and worries about the global economy encouraged "˜safe-haven' demand. Worries about the global economy escalated last night as data showed a sharper than expected drop in US industrial production and Germany's wholesale prices suffered their largest fall in 22 years. German wholesale prices fell 0.9%m/m, well below forecasts for a drop of 0.3%. In the US, industrial production fell 1.5%m/m (worse than forecasts for a 0.9% drop) and annual CPI fell 0.4%y/y (well below -0.1% forecast). In addition, anecdotes from the Fed's Beige Book painted a dismal picture about the prospects for US growth. Global equities also chalked up modest losses last night. UBS punctured the positive sentiment towards the banking sector by reporting a US$1.7b loss for Q1 and announcing that it will slash its work force by 11%. The gloomy UBS outlook made a stark contrast to the upbeat tones projected by Goldman Sachs and Wells Fargo in recent days. The FTSE fell 0.5%, the DAX dropped 0.2% and the S&P500 is currently up 1.25%. Against a generally firmer USD, EUR/USD slipped from nearly 1.3300 to below 1.3150. However, comments from ECB council member Weber added to the weight on EUR. Weber said the ECB will announce "non-standard measures" to boost the Eurozone economy in May. EUR/USD is now 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. The near-term fortunes of currencies will depend greatly on how global sentiment unfolds. Should global equities remain heavy and investor confidence continue to unravel, we'd expect "˜safe-haven' demand to underpin the USD and weigh on JPY crosses like EUR/JPY. In this regard, investors will be keenly watching how global equity markets react to upcoming US bank earnings releases and today's Chinese data. Over the past few months, stronger than expected Chinese data has seen investors become hopeful that a Chinese recovery will help pull the world economy out of recession. As such, today's Chinese data will be closely watched for an update on how the economy is faring. Market participants are looking for Q1 GDP to grow 6.2% and industrial production to expand 6.3%y/y in March. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.