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Opinion: Slumping global economy dragging on NZ dollar

Opinion: Slumping global economy dragging on NZ dollar

By BNZ Currency Strategy Danica Hampton NZD/USD spent most of Friday trading choppily within a 0.5200-0.5350 range NZD/USD was initially pitched lower by renewed fears about a deep and prolonged global recession. US non-farm payrolls revealed that 533,000 Americans lost jobs in November and the unemployment rate climbed to 6.7%. Reignited global recession fears saw commodity prices plummet and encouraged investors to dump growth sensitive currencies like NZD. The CRB index (a broad measure of commodity prices) fell 4.3%, crude oil prices fell about 6% and NZD/USD was dragged down to around 0.5200. But a sharp recovery in US stock markets helped revive investor confidence and lift NZD/USD off its lows. US stocks were comforted by news the US Treasury was legally obligated to inject capital into its troubled mortgage agencies and by Congressman's Frank comments that a deal to save the US auto industry would be passed. The S&P500 managed to climb 3.65% and NZD/USD finished the week above 0.5300. While global developments have tended to be the primary driver of the NZD/USD, the local news isn't much better. Over the weekend, Prime Minister John Key warned that economic forecasts for NZ are looking increasingly dire and said he thought the currency would fall further. The QV housing report showed that prices fell 6.8% for the year ending November and this week's partial indicators for Q3 should also help provide colour on the extent of the local economy's current distress. Ugliest of the lot is likely to be the Q3 building data (Monday), but we are also expecting another miserable reading from our PMI index (Thursday). Friday's retail sales will also be of interest. While the October 1 tax cut should have boosted spending, this will likely be offset by sharp reductions in car sales and the price of petrol, leaving the headline number close to zero. While bigger picture we continue to see downside risks for the NZD/USD, expect the currency to take its near-term cues from global equities. Should we see a rebound in global equities, and a recovery in investor confidence, NZD/USD has the potential to be squeezed back up towards 0.5450-0.5500 this week. However, given the backdrop of slowing global growth, the NZ recession and falling NZ interest rates we expect bounces to attract sellers. On the downside, we'll need to see a convincing break below support in the 0.5190-0.5200 region to see the downtrend gain traction again. The USD edged higher against the most major currencies as investors digested extremely weak US non-farm payrolls and news the US government will step up measures to curb the recession. US non-farm payrolls fell a dramatic 533,000 in November, well below forecast for a drop of 335,000. Nearly two million Americans have lost their jobs so far in 2008 and the unemployment rate has pushed up to 6.7% (well above October's 6.5%). The shocking US data reignited fears about a deep and prolonged global recession. Commodity prices were hammered - the CRB index (a broad measure of commodities) fell 4.3% and crude oil prices fell about 6% to US$40.50/barrel - the lowest level in nearly four years. In currency markets, this saw the USD and JPY outperform as investors ditched growth sensitive currencies. EUR/USD sipped from above 1.2800 to below 1.2650 and USD/JPY sank to 91.60. While US stock markets opened with steep losses, these were quickly erased. The US Justice Department announced that the US Treasury was legally bound to inject more capital into government sponsored mortgage agencies Freddie Mac and Fannie Mae. The announcement was quickly followed by the Fed's first purchase of mortgage agency paper and positive comments from Congressman Frank, who said it was likely a deal to save the US auto industry will be passed. The S&P500 managed to climb 3.65% on Friday (but still finished the week 2.25% lower). The impressive recovery in US stock markets helped revive investor confidence and lift currencies off their lows. USD/JPY climbed from around 91.60 to 93.00, helped by rumours of Asian sovereign demand. EUR/USD rebounded from 1.2650 to nearly 1.2750 "“ although real money accounts and corporate sellers continued to sell EUR on bounces. It's possible that last week's slew of aggressive rates cuts and expectations of further government action to curb the US recession will see financial markets stabilise a bit this week. Should global equity markets recover, expect to see a bit of USD weakness and a rebound in EUR/USD. However, given the backdrop "“ where recent data has shown activity around the world is collapsing and unlikely to improve any time soon "“ we continue to think lingering fears about a global recession will mean that any USD weakness is short-lived. As a result, EUR/USD will likely struggle to gain traction above last week's 1.2850 high and we suspect 1.3000 will prove too great a hurdle. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.

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