Opinion: Kiwi up on weak US$, but bounces will be limited

By Danica Hampton After sinking to nearly 0.5000 early on Friday evening, a generally weaker USD saw NZD/USD climb back towards 0.5150 as the week drew to a close. Through much of Friday, NZD/AUD supply weighed on NZD/USD. RBA Governor Stevens' parliamentary testimony reminded investors that the RBA had front-loaded its monetary policy easing and Stevens effectively watered down expectations for further aggressive rate cuts. Weak global equity markets and fears about US bank nationalisations added to the downward pressure and NZD/USD sank to nearly 0.5000. But the NZD/USD weakness didn't last. A large sell order for USD/CHF triggered a violent bout of profit-taking and the USD weakened against most major currencies. Against a generally weaker USD, the NZD/USD rebounded back towards 0.5150. Globally, currency markets are struggling to find direction. Investors are still worried about the global recession and equity markets are still weak. But 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. While we suspect the USD will emerge the victor by default, we may see a bit of choppy trading near-term. For the coming week, fears about the global recession and weak global equities should help limit bounces in NZD/USD. However, we suspect we'll need to see fresh impetus in the form of negative global or local news (watch for Thursday's NBNZ Business Outlook) to push the currency below solid support around 0.5000. Initial headwinds are seen ahead of 0.5180-0.5200. The USD weakened against most major currencies on Friday night, as investors locked in profits ahead of the weekend. Fears of bank nationalisations saw equity markets plunge on Friday night. Citigroup tumbled as much as 30% before paring losses as White House spokesman Robert Gibbs said the administration wants to maintain a ''privately held banking system.'' Shares in Bank of America plunged as much as 36% before recouping most of the drop after CEO Kenneth Lewis said the bank can survive ''on our own.'' Europe's benchmark index sank to a six-year low, while Japan's Topix plunged to its lowest level since 1984. The S&P500 fell 6.9% last week, its largest weekly drop in three months. Risk aversion and soft equity markets saw the USD strengthen through most of last week, as investors sought out the relative safety of USD denominated assets. Over the course of the week, EUR/USD slipped from above 1.2800 to nearly 1.2500. However, widespread profit-taking on long USD positions set in on Friday. A large sell order in USD/CHF seemed to be the catalyst for the USD weakness - USD/CHF plunged from around 1.1800 to below 1.1600 in less than 10 minutes. The violence of the move caught market participants off guard. Before long, Asian sovereign names, macro funds and model accounts were also selling USDs. Against a generally weaker USD, EUR/USD surged from around 1.2550 to above 1.2850. The JPY seemed to lose some of its "safe-haven" status last week. It's become evident Japan is not immune to the global recession (Japan's Q4 GDP fell 3.3%q/q) and repatriation flows appear to have dissipated. In fact, MOF data shows Japanese investors' purchases of foreign bonds rose were their largest since October 2005 (for the week ending February 14). USD/JPY climbed from around 91.50 last Monday to nearly 94.50 on Friday night. Currency markets are grappling for direction. With the "trusted" relationship between JPY and equity markets breaking down, and interest rate spreads around the world converging, investors now seem to be focusing directly on economic growth. Japan's disastrous 3.3% q/q Q4 GDP decline compares miserably with other industrialised nations; surpassing even Germany's dire 2.1% decline. This suggests USD/JPY may well push a little higher near-term. But investors don't want to buy EUR either because of the risks associated with Eastern Europe, the ECB's measured approach to cutting rates and the lack of a single EU-Treasury means that it is very difficult to adopt more radical policy measures (like those pursued by Japan and the US). Further clues on the outlook for Eurozone growth will come from this week's German IFO (Tuesday) and European Commission activity surveys (Thursday). On balance, it looks like the USD will emerge looking the best of a bad bunch, but we may see a bit of choppy consolidation near-term. We expect EUR/USD will struggle above 1.3000 and suspect we'll see 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.