Opinion: Kiwi above 52 USc after markets see higher than expected OCR

By Danica Hampton The RBNZ reined in interest rate easing expectations at little with yesterday's Monetary Policy Statement (MPS). Not only did the central bank cut "just" 50bps to 3.00% (which was at the smaller end of expectations), but it signalled that 2.50% would be the likely trough in the OCR (prior to the decision market pricing was consistent with a trough closer to 2.25%). In reaction, interest rates backed up a bit and the NZD/USD bounced from around 0.5080 to nearly 0.5150. (Editor's note: the NZD/USD had risen to around 0.5220 by 9:20 am, and was at 0.5209 at time of publishing 13/3/2009.) The RBNZ made it clear that the future path of monetary policy is dependent on how the outlook for growth, both here and abroad, unfolds. The central bank's projected 2.50% trough in the OCR is dependent on growth in NZ starting to pick up in the second half of the year. We suspect economic activity in NZ will disappoint the RBNZ's expectations and remain comfortable with our current forecasts of the OCR falling to 2.0% by mid year. Overnight, NZD/USD extended its gains, supported by a surge higher in both NZD/CHF and NZD/JPY. The Swiss National Bank really took centre stage. As widely expected the SNB cut rates 25bps to 0.25%, but it also pulled the pin on currency intervention by saying it would purchase foreign currency in order to "prevent any further appreciation of the Swiss franc against the euro". In reaction, the CHF skidded sharply against most currencies. USD/CHF surged more than 3% from below 1.1600 to above 1.1900, while NZD/CHF climbed almost 4% from below 0.5900 to nearly 0.6150. NZD/JPY also climbed steadily last night, from below 49.00 to above 50.50. The JPY has suffered overnight amid renewed fears about the health of Japan's economy and recovering risk appetite following solid gains in US and European equities. While stock markets in Asia were relatively soft, European and US equity markets managed to eke out gains for the third consecutive day, despite Standard & Poor's cutting GE's credit rating from AAA to AA+. The S&P500 is currently up 2.5%. While NZD/USD has nudged higher overnight, it's difficult to get too excited while the currency is still just treading water within familiar ranges. For today, dips will likely be limited to 0.5075-0.5080. On the topside, headwinds are expected ahead of 0.5200, but a push up towards 0.5250 is possible in the near-term if global equities continue to recover. However, we suspect we'll need to see evidence the global backdrop is actually stabilising and that the recent recovery in equity markets is sustainable for NZD/USD to sustain bounces above 0.5200. The USD firmed a little against the EUR and GBP last night, but the standout theme of overnight session was generalised CHF weakness after the Swiss National Bank pulled the pin on intervention. As widely expected, the Swiss National Bank cut interest rates 25bps to 0.25% last night and announced a shift to quantitative easing. With the Swiss economy facing its worst recession in over three decades, the SNB warned the strengthening of the CHF represented an inappropriate tightening of monetary conditions. As such, it has "decided to purchase foreign currency on the foreign exchange market, to prevent any further appreciation of the Swiss franc against the euro. "In reaction, USD/CHF jumped more than 3% from below 1.1600 to above 1.1900 and EUR/CHF surged from 1.4800 to above 1.5300. The SNB news pretty much overshadowed everything else in currency markets. While generalised CHF weakness paved the way for a firmer USD, the JPY was a bit of an exception. The past 24 hours have been very choppy for USD/JPY. Yesterday afternoon, USD/JPY dived from above 97.50 to a 2-week low of below 96.00 amid heavy selling from Japanese accounts. However, the JPY strength didn't persist. While Japan's Q4 GDP was revised higher yesterday to -3.2%q/q from -3.3%, it reminded investors just how badly the economy is suffering. Indeed, it looks terrible relative to the -1.6% seen in the US and the -1.5%q/q seen in both the UK and Eurozone over the same time horizon. Before long, USD/JPY had raced back up above 98.50. There was something for everyone in last night's economic data. For those looking at the "half empty glass", German industrial production fell 7.5%m/m in January "“ its largest monthly fall since reunification in 1990. The collapse in industrial production has seen economists downwardly revise German GDP forecasts for 2009. For the "glass half full" camp, US retail sales weren't quite as bad as expected. Nominal sales in February fell just 0.1% (vs. -0.5% forecast), while sales excluding autos rose 0.7% (vs. -0.1% forecast). While stock markets in Asia were relatively soft, European and US stock markets managed to eke out gains for the third consecutive day, despite Standard & Poor's cutting GE's credit rating from AAA to AA+. The FTSE rose 0.5%, the DAX rose 0.95% and the S&P500 is currently up 2.5%. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.