Opinion: Kiwi to 6-yr low, 50 USc likely very soon
30th Jan 09, 9:42am
By BNZ Currency Strategist Danica Hampton The NZD/USD fell to a fresh six year low last night in the wake of yesterday's trifecta of NZ news "“ the RBNZ's rate cut, the Crown Accounts and December's trade data. The RBNZ surprised markets by cutting 150bps to 3.50%. While we'd thought a more conservative 100bps might do the trick - we have no difficulty with the RBNZ's move in light of the horrible global backdrop. The RBNZ is clearly worried about what's happening offshore and the implications for NZ, so it's taken a no-holds barred approach. With further downgrades in the global outlook yet to come, we suspect the RBNZ will have no option but to cut rates even further. We look for another 75bps cut in March, on the way to an eventual low of 2.0% by June. While the RBNZ decision was the primary focus, the Crown accounts and the trade balance shouldn't be overlooked. The worsening trade deficit means NZ's already large current account deficit will likely get within spitting distance of 10% as a proportion of GDP, which combined with NZ's deteriorating fiscal position, will keep the rating agencies nervous. NZD extended its losses through the overnight session. Most currencies fell against the USD and the JPY as last night's economic news keep fears about global recession alive. ECB President Trichet said the ECB has not ruled out cutting rates below their current 2%. Germany's unemployment rate climbed to 4.8% and EU Commission survey's suggested the Eurozone recession is deepening. In the US, the weekly jobless report showed that continuing jobless claims have surged to record highs. Equity markets across the world slipped lower and the S&P500 is currently down 2.75%. Overnight, NZD actually regained a bit of ground against the AUD, climbing from below 0.7820 to nearly 0.7900, as a slew of short-term players and macro accounts took profits on "short NZD/AUD" positions. It seems that demand for AUD has been tempered by growing caution ahead of next week's RBA cash rate decision and following media reports that Rio Tinto are facing funding issues. For today, the deteriorating global backdrop, combined with lacklustre local sentiment, should keep NZD/USD heavy. We suspect bounces will be limited to 0.5180-0.5200. On the downside some support is seen around 0.5120-0.5100, but a deeper pull-back towards 0.5000 looks likely in coming sessions. The USD and JPY strengthened against most other currencies last night, as weak global data reinforced global recession fears and equity markets slipped lower worldwide. EUR/USD dropped sharply last night, from above 1.3150 to below 1.2950. After dampening down expectations for a February rate cut yesterday, Trichet did a bit of a flip-flop last night. Trichet said the ECB has not ruled out cutting rates below their current 2% nor excluded "taking "˜non-standard' policy actions to respond to the economic crisis". Swiss National Bank Chairman Roth also did a bit of a flip-flop last night. After warning that the Swiss National Bank could take aggressive action to weaken the CHF last week, Roth said there was "no need to act on the Franc" although they were watching carefully. Soft Eurozone data added to the EUR's woes. The German unemployment rate pushed up to 7.8% (from 7.6% in December) and the EU Commission surveys suggest the Eurozone recession is deepening. Both the business climate and economic sentiment index fell to new lows in January, and now remain well below the previous trough reached in 1993. The economic news from across the Atlantic was also fairly lacklustre. Durable goods orders fell 2.6%m/m in December (vs. -2.0% forecast), the weekly jobs report showed that continuing jobless claims have hit a record high and new home sales fell 14.7%m/m to 331,000. With the latest economic news reinforcing the dire state of the global economy, combined with lacklustre earnings reports from US companies like Eastman Kodak and Qualcomm, it's not surprising global equities slipped last night. The FTSE fell 2.5%, the DAX dropped 2% and the S&P500 is currently down 2.75%. While profit-taking on long USD positions and improving risk appetite has provoked a bit of USD weakness early this week, we doubt it will persist. We suspect global recession concerns and convergence of policy rates will underpin the USD in the coming months. .Meantime, European sovereign debt concerns continue to weigh on EUR sentiment and this week's data has done nothing to dispel the view the Eurozone economy is slowing sharply and the ECB will have more work to do. As such, we suspect EUR/USD will remain heavy and look for a pull-back towards 1.2750-1.2800 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.