Opinion: Kiwi bounces limited by OCR cut anticipation

By Danica Hampton The NZD/USD spent Friday night within a familiar 0.5000-0.5100 range. An awful US non-farm payrolls release (jobs fell 651,000 and the unemployment rate rose to 8.1%) triggered a brief bout of USD weakness, which saw NZD/USD push up towards 0.5100. However, anticipation of RBNZ rate cuts and some NZD/AUD supply meant that bounces in NZD/USD were limited. For the coming week, we suspect Trans-Tasman events will take centre stage for NZD. Locally, the RBNZ decision on Thursday will be the main draw card. In recent missives, the RBNZ has expressed deep concern about the impact of the global recession which, if anything, continues to intensify. However, as the RBA's on-hold decision highlighted, economic conditions in this neck of the woods aren't nearly as severe as those seen elsewhere. It's for that reason we expect the RBNZ to affect a more moderate, 50bp cut on Thursday, compared to the substantial cuts made in recent meetings. In addition to the RBNZ, we also get some partial indicators of Q4 GDP (due 27 March, and which we currently see at -0.6%). While across the Tasman, we'll get updates on the state of the Australian economy in the form of the NAB Business Survey (Tuesday), Consumer Sentiment (Wednesday) and the employment report (Thursday). Signs that the Australian economy is deteriorating at a sharper than expected pace may well see market participants squeezed out of short NZD/AUD positions. It's difficult to get too excited about the NZD/USD while it's trading within familiar ranges. And we suspect we'll see more range trading this week. On the downside, initial support is seen around 0.4980, but it will take a break below 0.4900 to suggest the downward trend is gaining traction. Initial headwinds are expected ahead of 0.5130, but the currency has the potential to be squeezed back towards 0.5200 should we see a substantive recovery in global equities and risk appetite. It was a case of "steady as she goes" for currency markets on Friday night. While investors mulled over another soft US payrolls report, US equities finished flat and there was little in way of fresh impetus to drive currencies. Friday's US non-farm payrolls reported a decrease of 651,000 jobs in February. While this was more or less on expectations, downward revisions to previous months saw the unemployment rate surge to 8.1% (well above forecasts for 7.9%). Since the recession began, the US economy has shed about 4.4m jobs, and about half of those positions have been lost in the past four months. Friday's jobs report effectively destroyed any hope of a near-term US economic recovery. Most economists now don't expect the US economy to start to improve until Obama's US$787b spending program begins to wash through the economy. Despite the awful US jobs report and resigned pessimism on the US economy outlook, US stock markets finished Friday night more or less flat. Financial shares were boosted by news the UK government and Lloyds Bank have agreed on a deal in the asset protection scheme (GBP260b worth of Lloyds's of assets in return for additional lending commitments worth GBP14b for each of the next two years). A surge in oil prices (Nymex crude oil futures rose US$5 last week to US$45.50/barrel) also helped underpin energy related stocks. The S&P500 rose 0.1% on Friday, but finished the week down 7%. GBP/USD came under a little selling pressure following the Lloyds news, falling from 1.4300 to 1.4040. However, EUR/USD spent most of Friday night within 1.2600-1.2750 range and USD/JPY between 96.50-98.50. Looking ahead, Japan's current account balance (due 12:50pm today) is expected to slip into deficit for the first time since 1996. However, there isn't a lot of data due out of the US, UK or Eurozone this week. With interest rates in the all major economies starting to converge, relative growth prospects (and the measures taken by policymakers in order to promote economic growth) have become increasingly important for driving currencies. Several ECB members are scheduled to speak during the week and the market will look for clues on the ECB's attitude towards quantitative easing and other unconventional forms of easing. The Swiss National Bank meets this Thursday, it's expected to cut 25bps and markets will be eager to see if the SNB is entertaining the idea of quantitative easing. Of course, currency markets will pay close attention to the performance of equity markets and any updates on the US bank rescue plan or clues to the future of General Motors. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.