Opinion: Attack on the 50 USc threshold is nigh
2nd Feb 09, 9:13am
By BNZ Currency Strategist Danica Hampton The NZD/USD fell to a fresh six year low of just under 0.5050 on Friday night amid fresh concern about a global recession and ongoing weakness in global equities. US GDP contracted at an annualised pace of 3.8% in Q4 2004 "“ the sharpest contraction seen in the US economy in 26 years "“ and was followed up soft Chicago PMI and University of Michigan consumer confidence releases. With the US downturn expected to accelerate in the first half of 2009, the prospects for global growth are looking increasingly dire. Meantime, equities dived amid disappointing corporate earnings and reports the US government's plan for a "bad bank" may be put on hold. The S&P500 closed down 2.28%. The deteriorating global backdrop continues to encourage investors to sell growth sensitive currencies like NZD in favour of the relative safety of USD and JPY. Some sporadic demand for NZD was noted, but mainly against crosses like AUD and EUR. After falling to nearly 0.7800 last week, NZD/AUD has now climbed back above 0.8000. It seems that demand for AUD has been tempered a little by caution ahead of this week's RBA decision. Sentiment towards the NZD has become very negative over the past few weeks "“ in light of terrible NZ data and last week's aggressive 150bps rate cut from the RBNZ "“ and this is unlikely to change this week. Business surveys of late have depicted a labour market that has very suddenly gone from being 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. However, it's probably still too soon for falling employment to be clearly reflecting in easing wage pressures in today's LCI and QES data. For the coming week, the deteriorating global backdrop, combined with lacklustre NZ sentiment, should keep NZD/USD heavy again this week. An attack on the 0.5000 is likely in coming sessions. The USD firmed against most major currencies on Friday night amid ongoing fears about a global recession and weak global equities. US GDP contracted at an annualised pace of 3.8% in Q4 2004, while not quite as bad as the 5.5% forecast, it was still the sharpest contraction seen in the US economy in 26 years. The lacklustre GDP report was followed up with a weak Chicago PMI (it fell to 33.3 in January vs. 34.9 forecast) and soft University of Michigan consumer confidence (it fell to 61.2 in January vs. 61.9 forecast). Worries about economic growth and disappointing corporate earnings weighed in global equities. A CNBC report suggesting the US government's plan to building a "bad bank" (for toxic assets) may be put on hold due to irresolvable pricing issues didn't help sentiment. The FTSE fell 0.97%, the DAX dropped 2.03% and the S&P500 closed down 2.28%. With the US downturn expected to accelerate in Q1 2009, the prospects for global growth are looking increasingly dire. Last week's Eurozone data suggested the recession in the region is deepening. And Friday's terrible Japanese industrial production and household spending data suggests Asia isn't faring any better. The worsening global outlook continues to see investors to ditch growth sensitive currencies in favour of the relative safety of the USD and JPY. EUR/USD slipped from above 1.3300 to below 1.2800 last week and USD/JPY spent most of last week within an 88.50-90.50 range. The coming week is packed full of economic data and central bank decisions, none of which are likely to inspire much confidence about the global outlook. In the US, Friday's 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. The Bank of England is expected to cut rates 50bps to 1.00% when it meets later this week. In contrast, ECB President Trichet has signalled the ECB's meeting this week will be unimportant compared to the rendezvous in March. As such, market participants are expecting the ECB to keep rates unchanged at 2.00% this week. Nonetheless, recent data has done nothing to dispel the view the Eurozone economy is slowing sharply and the ECB will have to cut rates further. EU-US 2-year government bond spreads fell 23bps last week to 0.585% - the lowest level since November 2007. Looking ahead, we suspect convergence of policy rates and concerns about a global recession will underpin the USD in the coming months. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.