Opinion: Kiwi falls to lowest level since 2002 after global melee

Opinion: Kiwi falls to lowest level since 2002 after global melee
Danica hamptonBy Danica Hampton NZD/USD fell below 0.4915 yesterday afternoon "“ its lowest level since November 2002. The NZD has been swept up in the global melee. Overnight, AIG posted a record Q4 loss of US$61.7b "“ the largest quarterly loss in US corporate history, HSBC shares fell 20% after it launched a GBP12.85b rights issue and European Union leaders rejected a mass bailout plan for Eastern Europe. Fears the financial crisis is escalating have seen equities plunge worldwide. The FTSE fell 3.8%, the DAX dropped 3.4% and the S&P500 is currently down 3.7%. Heavy losses in global equities and risk aversion have seen investors ditch growth sensitive currencies like NZD in favour of the relative safety of USD. However, the break below 0.4965 the February 2 low encouraged a wave of NZD selling from momentum and technical-driven accounts. It hasn't all been one-way traffic in NZD. A variety of local accounts have used to the fresh six year lows as an opportunity to top-up export cover and profit-taking on short NZD/AUD positions (ahead of today's RBA monetary policy decision) has lent a bit of support to NZD/USD. For today, the backdrop of weak global equities and risk aversion should ensure that bounces towards 0.4990-0.5000 attract sellers. Initial support is seen around 0.4910-0.4920, a break below this level will open up the downside towards November 2002 low of 0.4855. The RBA decision will be a key event today (due 4:30pm NZ time). Recent rhetoric from RBA officials, and various media articles, suggests the central bank is comfortable enough to sit back and assess the impact of the lower AUD, fiscal spending and aggressive rate cuts flow into the economy "“ before deciding if further stimulus is required. Nonetheless, market participants are spilt between whether the RBA will keep rates steady or cut 50bps 2.75% at today's meeting. Safe-haven demand saw the USD strengthen against most major currencies last night as heavy losses in global equities sparked fears the financial crisis is escalating. AIG announced a record Q4 loss of US$61.7b last night, the largest quarterly loss in US corporate history. Just before the profit announcement, the US government confirmed the troubled insurer would receive an additional US$30b in government support (AIG was the recipient of US$150b worth of government aid last year). Nonetheless, the massive AIG loss, which equates to US$22.95 per share, has investors concerned that the financial crisis is escalating. Across the Atlantic, the situation looks just as dire. Shares in HSBC fell about 20% after the bank launched an GBP12.85b rights issue (where it sold 5.1b shares at a 48% discount to Friday's close). Meantime, European Union leaders rejected a mass bailout for Eastern Europe (Hungary had proposed an €180b rescue package). The FTSE fell 3.8%, the DAX dropped 3.4% and the S&P500 is currently down 3.7%. Heavy losses across global equities saw investors seek out the relative safety of the USD. EUR/USD slipped from above 1.2650 to below 1.2550, not helped by the Eurozone PMI which showed that manufacturers had their worst month in 12 years. Recent indicators of Eurozone activity suggest Q1 GDP will contract by more than the 1.5% seen in Q4, which should ensure the ECB cuts 50bpts to 1.50% this Thursday. Against a generally firmer USD, GBP was the biggest loser. GBP/USD plunged from around 1.4300 to nearly 1.3950. In addition to the heavy losses seen in UK financial stocks, expectations the Bank of England is close to embarking on quantitative easing has also taken a toll on GBP sentiment. Debate still reigns on whether or not the Bank of England will cut interest rates this week (economist estimates range from 0-50bps). But regardless of the interest rate decision, the BoE is expected to signal that it will pursue alternative measures to free-up credit markets and promote economic activity. At first glance, last night's US data didn't look too bad. The ISM manufacturing index rose to 35.8 in February, while still well below the 50 threshold the signals contraction, the result was better than the 33.8 forecast. However, the employment index fell heavily from 29.9 to 26.1, sparking fears that this Friday's non-farm payrolls release may be even weaker than the 650,000 fall currently forecast. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.

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