Opinion: Kiwi falls on risk aversion after string of bad news

Opinion: Kiwi falls on risk aversion after string of bad news
Danica HamptonBy Danica Hampton After climbing to nearly 0.5200, NZD/USD swiftly slipped back below 0.5100 last night amid risk aversion and growth fears about the global outlook. Fed Chairman Bernanke reaffirmed that the US government doesn't want to nationalise banks, but investors now want more detail on how the US government plans to support the US banking sector. Meantime, Standard & Poor's warned that further sovereign ratings downgrades were likely this year. And the economic data did nothing to inspire confidence in the global outlook. Japan's exports plunged 45.7% in January, leaving the trade deficit at its worst on record. German GDP fell 1.6%y/y in Q4, UK GDP for the same quarter was revised down to -1.9%y/y and US existing home sales dropped 5.3% in January to 4.49m. Rising fears about the global outlook and soft global equities prompted investors to ditch growth sensitive currencies like NZD in favour of the relative safety of USD. A mix of real-money accounts and macro-funds were also noted sellers of both AUD and NZD last night. Locally, the focus will be on the National Bank Business Survey. December's survey was dreadful (as was the Q4 QSBO, released mid-January) and if the weakening in the global outlook since then is anything to go by, February's update will look at least as bad. All the same, we'll be interested to see if falling interest rates, fiscal stimulus and the lower NZD are amounting to any sort of meaningful offset. Amid growing concern about NZ's current account deficit, it will also be worth keeping an eye out for the monthly trade data (due 10:45am), where the market is looking for the deficit to widen to NZ$450m. Given worries about the global backdrop, we look for NZD/USD to remain heavy today. We suspect bounces will be limited to 0.5150-0.5160. Initial support is seen ahead of 0.5050-0.5060, but heavy losses in Asian equities or a soft NZ data could see currency push back towards 0.5000. The USD strengthened against the major currencies last night, as fears about the global outlook resurfaced and equity markets sank. EUR/USD slipped from around 1.2900 to below 1.2700 last night as fears about further sovereign downgrades rattled risk appetite and prompted investors to seek out the relative safely of USDs. Head of sovereign ratings at Standard & Poor's, David Beers, warned that more sovereign downgrades were likely this year amid increasing "concern and uncertainty" about the challenges governments are facing. Soft economic data from around the globe did little to inspire confidence in the global economy. Japan's exports plunged 45.7% in January, leaving the trade deficit at its worst on record. Data confirmed German GDP fell 1.6%y/y in Q4, UK GDP for the same quarter was revised down to -1.9%y/y (from -1.8%). In the US, existing home sales dropped 5.3% in January to 4.49m (well below forecasts of 4.79m). GBP/USD slipped from above 1.4600 to below 1.4200. UK financial stocks were bolstered a bit by the UK government's plan to underwrite toxic assets held by RBS and Lloyds (in return for each bank lending an additional £20b to small businesses and households). But downbeat comments from Bank of England officials zapped any confidence in the UK economy. Kate Barker warned that British growth may not restart until the end of 2009. David Blanchflower said the "UK economy is in dire straits" and warned the recession may worsen "significantly". Blanchflower added that the unemployment rate may rise to nearly 10% by the end of the year. Once again, Fed Chairman Bernanke reaffirmed that the government did not want to nationalise banks. But investors want more details on how the US government plan to support the troubled banking sector. While the FTSE climbed 0.9%, the DAX dropped 1.3% and the S&P500 is currently down 2.0%. Investors are still very worried about the global outlook and we suspect the USD will remain the "safe-haven" currency of choice in coming weeks. We expect EUR/USD will struggle above 1.3000 and look for a move back towards 1.2500. The JPY appears to have lost some of its "safe-haven" status, thanks to increasing concern about the health of the Japanese economy. While USD/JPY may push a little higher near-term, we are mindful that repatriation flows ahead of fiscal year-end (31 March) will likely provide some support to JPY. * 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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