Opinion: Potential for Kiwi to squeeze 53 USc in near-term

By Danica Hampton The NZD/USD has spent most of the past 24 hours consolidating within a 0.5050-0.5150 range. The overnight news was fairly awful. Worries about emerging Europe resurfaced after Standard & Poor's downgraded Latvia's sovereign debt to junk status and put Lithuania and Estonia on negative watch. The German IFO business confidence index fell to a new record low and German GDP looks on track to be at least as weak as Q4's 2.1%q/q. In the US, Fed Chairman Bernanke warned the US economy was suffering a "severe contraction" and would likely worsen significantly over the coming year. The US data backed up Bernanke's downbeat view. Conference Board consumer confidence fell to a new record low of 25 in February and the S&P/CaseShiller house price index fell 18.5%y/y. Meantime, troubled insurer AIG looks like it will need further assistance from the US government. Despite last night's lacklustre news, with US stock markets hovering around levels not seen since 1997 bargain hunting saw the S&P500 rebound strongly last night. The S&P500 is currently up 3.4%. As US stocks recovered, easing risk aversion triggered a bout of generalised USD weakness and NZD/USD was dragged up towards 0.5150. Ongoing weakness in JPY (thanks in part to a global investment banks "buy USD/JPY" recommendation) also saw JPY crosses like NZD/JPY rebound last night and this helped provide a bit of support for NZD/USD. It is difficult to get overly excited about NZD/USD while it continues to trade within familiar ranges. Some headwinds are expected ahead of 0.5180-0.5200. However, should global equities continue to recover strongly, NZD/USD has the potential to be squeezed back up towards 0.5300 near-term. On the downside, initial support is seen ahead of 0.5050-0.5060. The USD weakened against the major currencies last night as bargain hunting saw US equities rebound, despite new concerns about European economies and Bernanke's downbeat testimony before the Senate. Troubles in Europe were once again in focus. Standard & Poor's downgraded Latvia's sovereign debt rating to BB+ from BBB-; Lithuania and Estonia were put on negative credit watch. Hungary's Prime Minister Gyurscany was quoted as saying "we're in serious trouble". UK retail data wasn't quite as bad as expected (the CBI Distributive Trade Index climbed to -26 in February, well above the -47 seen in January). But the German IFO business climate index slipped from 83.0 to 82.6 - a new record low. Leading indicators suggest Germany's Q1 GDP will be at least as weak as the -2.1%q/q contraction seen in Q4. Asian equities sank 2-5% across the board, the FTSE fell 0.9% and the DAX dropped 1%. On the other side of the Atlantic, Fed Chairman Bernanke testified before the Senate. Bernanke assured the committee the Fed was "committed to using all available tools" to free-up credit markets. But warned the economy was suffering a "severe contraction" and would likely worsen significantly over the coming year. There's also some media attention on the troubles at AIG. AIG is reportedly looking for additional assistance from the US government (it's already had US$150b worth of support) amid reports it will report a US$60b loss next week. The economic data was also fairly bleak. Conference Board consumer confidence fell to 25.0, well below forecasts for 35.0. The S&P/CaseShilller House Price Index fell 18.55%y/y, and the Richmond Fed manufacturing index slipped to -51 (vs. -49 forecast). Despite last night's lacklustre news, with US stock markets hovering around levels not seen since 1997 after falling more than 7% since last Monday, bargain hunting saw the S&P500 rebound last night. While the rebound in US stocks saw the USD weaken broadly last night, we doubt this USD weakness will persist. Investors are still worried about the global recession and the potential for further equity weakness. The JPY appears to have lost some of its "safe-haven" status (thanks to last week's terrible Japanese GDP and dissipating repatriation flows). Given the troubles in Eastern Europe and Europe's measured approach to monetary and fiscal easing, investors aren't keen on EUR either. As such, we suspect the USD will remain the "safe-haven" currency of choice over coming weeks. We expect EUR/USD will struggle above 1.3000 and look for a move back towards 1.2500 over the coming weeks. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.