By BNZ Currency Strategist Danica Hampton All the stars aligned for NZD weakness yesterday. The NZD has been the worst performing currency over the past 24 hours, falling from above 0.5800 yesterday morning to below 0.5500 last night. First up, December's Quarterly Survey of Business Opinion (QSBO) showed that a massive 43% of firms expect a decrease in own activity over the next three months "“ the worst result since at least 1970! Forward looking indicators of activity were equally horrific and the gauges of price pressures also caved. Our economists are now tipping the RBNZ to cut rates 75bps to 4.25% on January 29 and continuing cutting rates until the OCR falls to around 3.50%. Then ratings agency Standard & Poor's set a cat amongst the pigeons by downgrading the outlook on NZ's AA+ foreign currency credit rating from "stable" to "negative". S&P pointed to the rising external imbalances (as evidenced by the current account deficit) and warned a downgrade was likely if these external imbalances begin to pressure investment, growth and fiscal performance. S&P have recently made similar outlook revisions to Greece, Ireland, Spain and Portugal.
And overnight, the global backdrop continued to keep the downward pressure on NZD/USD. Ongoing concern about the global outlook and soft equity markets continued to see investors ditch growth sensitive currencies like NZD in favour of the relative safety of USD and JPY. An improvement in November's US trade deficit, and expectations of ECB rate cuts on Thursday, also helped support the USD. Looking ahead, the combination of concern about the global outlook and the deteriorating local backdrop should ensure bounces in NZD/USD are limited. For today, we suspect the topside will be limited to 0.5550. On the downside, initial support is seen ahead of 0.5420, but a deeper correction back towards November's sub-0.5200 lows shouldn't be ruled out over coming weeks. The USD strengthened against all the major currencies last night, amid ongoing concern about the global outlook and better than expected US trade data. A string of negative news, combined with last week's batch of weak global data, has left investors very worried about the global outlook. Ratings agency Standard & Poor's warned it may downgrade NZ's and Portugal's foreign currency sovereign debt rating (similar announcements have recently been made for Greece, Ireland and Spain). Last night, Fed Chairman Bernanke warned that fiscal stimulus along would not be enough to promote a lasting US recovery and said further steps to promote bank lending were needed. Global equities fell moderately. The Nikkei slipped 4.79%, the DAX is down 1.75% and the FTSE fell 0.61%. The S&P500 is currently down 0.6%. Better than expected US trade data also helped the USD. November's US trade deficit improved to -US$40.4b, better than the -US$51.0b forecast "“ the smallest its been since November 2003. The IBD/TIPP economic sentiment index also climbed to 45.4 in January (vs. forecasts of 44.0). At the margin, a story suggesting some multi-national companies are lobbying for US tax waivers may have also provided some USD support. Under the proposal, foreign subsidiaries would be able to lend cash to parent companies for up to two years without triggering tax charges. If passed, it's estimated the proposal would result in capital flows into the US of around US$655b. Against a generally firmer USD, EUR/USD plunged from around 1.3350 to below 1.3200 "“ its lowest level in a month. It seems growing conviction the ECB will cut rates aggressively in coming months is taking a toll on EUR, despite the German coalition government agreeing to an additional fiscal stimulus package of EUR50b last night. The ECB meets on Thursday and is widely expected to cut the cash rate 50bps to 2.00% this week. GBP/USD slipped steadily last night, from above 1.4750 to nearly 1.4500, weighed down by weak UK data. Retail sales fell 3.3% in December and the UK trade deficit widened to a record GBP8.33b in November (imports fell 1.8%m/m, but exports slumped 5.8%m/m). Looking ahead, we continue to think concerns about a global recession, and convergence of global policy rates, will keep the USD and JPY firm over coming months (albeit the pace of appreciation is unlikely to be as rapid as that seen through the latter half of 2008). * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.