Opinion: Kiwi dollar dips below US 50c as bank ratings worries mount
3rd Feb 09, 9:53am
By Danica Hampton The NZD/USD fell below 0.5000 for the first time in six years last night. The local currency was caught up in a wave of risk aversion amid fresh fears about the European financial sector. Ratings agency Moody's cut the long-term ratings on UK bank Barclays and shares in BNP Paribus shares plunged 12% after news its takeover of Belgium's Fortis would not expand its capital base. Heavy losses in European equities saw investors sell growth sensitive currencies like NZD in favour of the relative safety of USD and JPY. However, the NZD weakness didn't last long. Better than expected US manufacturing ISM data and hopes the US Senate will piece together a bank bailout plan this week saw US equities erase much of their earlier losses. The rebound in US equities triggered a squeeze on short currency positions; EUR/USD sprung back from around 1.2750 to nearly 1.2900 and NZD/USD was dragged back towards 0.5050. While we've seen a bit of a recovery in risk appetite and a touch of USD weakness last night, it's premature to think the world is suddenly a better place. Certainly this week's global data (which includes US non-farm payrolls) and central bank decisions are unlikely to inspire much confidence about the global outlook. In fact, the rapid deterioration in the global backdrop will likely see the RBA cut interest rates 100bps to 3.25% when it meets today (decision 4:30pm NZ time). Nor should we forget the dire state of the NZ economy and that this week's HLFS will likely show the labour market has gone from red hot to stone cold. We look for employment to fall 0.6% in Q4's HLFS and the unemployment rate to climb to a 5-year high of 4.6% on Thursday. As such, while we may see NZD/USD nudge a little higher today, we'd caution against getting overly bullish towards the NZD/USD. For today, dips are expected to be limited to the 0.5000-0.5020 region. Some headwinds are expected ahead of 0.5100, but a continued recovery in global equities could see NZD/USD push up towards 0.5150. It was a roller coaster night for currencies. The first half of the night was characterised by fresh concern about the UK banking sector, risk aversion and a stronger USD. But the USD erased its gains through the second half of the night following a better than expected US manufacturing ISM and rebounding US equities. Early in the night, fears about the financial sector kept investors risk averse. Ratings agency Moody's cut its long-term ratings on Barclays Bank by two notches to Aa3, citing expectations for "significant" further losses. BNP Paribas shares fell 12% after news that its deal to acquire Belgium's Fortis would not increase its capital base. Heavy selling of financial stocks saw European equity markets slide. The FTSE fell 1.7% and the DAX dropped 1.55%. Deepening worries about the European financial sector and risk aversion saw most currencies sold as investors sought out the relative safety of the USD and the JPY. EUR/USD sank to nearly 1.2700 and USD/JPY slipped to 88.80. However, GBP/USD was hit particularly hard, falling from above 1.4400 to around 1.4050. But sentiment changed swiftly. The manufacturing ISM climbed to 35.6 in January, well above forecasts for 32.5. While the manufacturing sector is still contracting, the pace of decline has eased. The better than expected data, combined with hopes the US Senate will piece together a bank bail out plan this week, saw US equity markets recover. After opening down about 1.5%, the S&P500 managed to claw its way into positive territory. Against a backdrop of rebounding equities and easing risk aversion, both the USD and JPY weakened as investors trimmed their "˜safe-haven' positions. EUR/JPY surged from below 113.50 to around 116.00 and EUR/USD was dragged from 1.2750 to nearly 1.2900. While we've seen a bit of a recovery in risk appetite and a touch of USD weakness last night, it's difficult to get overly confident on the global outlook. The coming week is packed full of economic data and central bank decisions, none of which are likely to inspire much confidence. The Bank of England is expected to cut rates 50bps to 1.00% this week, and while the ECB will likely keep rates steady this week further rate cuts are expected in March. Meanwhile, Friday's US non-farm payrolls is forecast to fall 500,000 in January, but given the recent slew of job cuts this could well prove to optimistic. We suspect convergence of policy rates and concerns about a global recession will continue to underpin the USD in coming weeks.