Opinion: Kiwi dipped below 50 USc following terrible US data
2nd Mar 09, 9:11am
By Danica Hampton NZD/USD slipped below 0.5000 on Friday night, pressured by risk aversion and heavy losses across global equities. Fears about US bank nationalisation (after the US government announced it will boost its stake in Citigroup to as much as 36% by converting up to US$25b in preferred stock to common stock) and terrible US data (US GDP contracted at an annualised pace of 6.2% in Q4) sent global equity markets sharply lower. The S&P500 slipped 2.4% to a 12 year low on Friday, and finished the week down 5.9%. Weak equities and fears about global recession fuelled "safe-haven" demand for USD, which kept NZD/USD under pressure. Steady selling of NZD/JPY was also noted; NZD/JPY skidded from above 50.00 to below 48.50. For the coming week, the global backdrop will likely remain the key influence on NZD/USD. Not only will investors be keeping a close eye on equity markets (worried that Bank of America will be the next US bank requiring government assistance), but there is a huge about of US data (including manufacturing and services ISMs and non-farm payrolls). In addition, the ECB, Bank of England and RBA have monetary policy decisions scheduled this week. Locally, this week's data will likely serve as a reminder that a slump in global demand is bad news for the NZ economy. Wednesday's ANZ commodity price index is expected to record another fall in (in both NZD and global price terms) and Thursday's wholesale trade data for Q4 should reflect a general shrinkage in external trade flows. Over the coming week, worries about the health of the global economy and expectations of further RBNZ rate cuts (ahead of the MPS on March 13) should help limit bounces in NZD/USD. However, dips below 0.5000 have tended to elicit solid support and we'll need to see a convincing break below the February 2 low of 0.4965 to suggest the downtrend is gaining momentum again. The USD strengthened against all the major currencies on Friday night as weak US data and heavy losses across global equities prompted "safe-haven" demand. Fears about US bank nationalisation sent global equity markets lower on Friday night. Citigroup shares tumbled 39% after the government said it will convert up to US$25b in the bank's preferred shares to common stock in a move that could dilute existing shareholders' ownership by 74%. Investors fear the US government will end up taking a large share in other US banks. Shares in healthcare and drug companies were also weak, amid worries that Obama's budget plans to rein in healthcare costs will strangle profits. The S&P500 fell 2.4% to a 12 year low on Friday; leaving the index down 5.9% for the week and 18.6% for the month. Friday's economic news did little to inspire confidence in the global economy. In the US, GDP sank at an annualised pace of 6.2% in Q4 (well down on earlier estimates of -3.8%). While in Japan, industrial production fell 10%m/m and household spending slipped 5.9%y/y. Although Japan's jobless rate was surprisingly strong; falling from 4.3% to 4.1%. In currency markets, heavy losses across global equities and renewed fears about global recession fuelled "safe haven" demand for USD. EUR/USD slipped from around 1.2750 to nearly 1.2600, despite the World Bank, EBRD and EIB putting together a â‚¬24.5b lending package for Central and Eastern Europe. While USD/JPY sank from above 98.50 to below 97.00 supported by month-end repatriation flows. The coming week is packed full of event risk. Not only will currency markets be keeping a close eye on equity markets (investors worry that Bank of America will the next bank requiring government assistance), but there is a barrage of US data (including the manufacturing and services ISMs and non-farm payrolls) and a host of central bank meetings. The ECB is widely expected to cut 50bps to 1.50% on Thursday. Debate still reigns on whether or not the Bank of England will cut rates again this week, regardless the BoE is expected to signal that it's pursuing alternative measures like quantitative easing. The RBA also meets this week, but investors have pared back easing expectations dramatically over the past few weeks (thanks to various RBA speeches and media articles such as the weekend Terry McCrann piece suggesting the RBA should pause). On average, economists are now only looking for a 25bps cut to 3.00%. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.