Opinion: This week's rate cuts confirm dire global economy

By BNZ Currency Strategist Danica Hampton As widely expected the RBNZ cut 150bps to 5.00% yesterday. The move was bang on market expectations and barely caused a stir despite its magnitude. While the RBNZ said interest rates are now in an "expansionary position", it acknowledged the downside risks to both growth and inflation. We expect to see further interest rate cuts over the coming months "“ another 50bps cut to 4.50% in January and expect the OCR to trough around 3.50-4.00%. NZD/USD spent most of the past 24 hours trading choppily within a 0.5300-0.5400 range. It's been a strange night in currency markets. We've seen a slew of interest rate cuts from various central banks - the ECB cut 75bps to 2.50%, the Bank of England cut 100bps to 2.00% and the Riksbank cut 175bps to 2.00%. UK house price data showed the sharpest decline in 25 years and Eurozone GDP contracted 0.2%q/q. Nonetheless, EUR/USD and GBP/USD spiked sharply higher (largely to corporate and fix-related flows) and NZD/USD was dragged above 0.5380. There's also been steady profit-taking on short NZD/AUD positions and this may have also helped prop up NZD/USD. This week's string of aggressive rate cuts has the potential to help restore investor confidence and provide a boost to global equity markets. However, given recent data has shown activity around the world is collapsing and Friday's US non-farm payrolls is expected to show 330,000 job losses in November alone, we think it's more likely that this week's bevy of rate cuts be viewed as simply confirming the dire state of the global economy. While these global recession fears prevail, and global equities remain under pressure, expect NZD/USD to remain heavy. For today, we suspect bounces towards 0.5380-0.5400 will attract sellers. On the downside, initial support is seen 0.5300 but solid support in around the 0.5250 region. It's been another choppy night in currency markets. The first half of the night was characterised by strong demand for USD and JPY as soft data out of the UK and Eurozone renewed concern about the global recession. HBOS data revealed that UK house prices dropped 14.9%y/y in November "“ the sharpest decline in 25 years. Meantime, Eurozone GDP contracted 0.2%q/q in Q3 bringing annual growth to a paltry 0.6%. EUR/USD slipped from around 1.2700 to nearly 1.2550 and GBP/USD plunged from above 1.4750 to below 1.4500. However, everything quickly turned on a dime. Currencies seemed to take a quantum of solace from the slew of rate cuts, which combined with solid corporate demand for EUR and some fixing flows, was enough to see short-term players squeezed out of positions. The USD weakened broadly, EUR/USD shot back up to nearly 1.2850 and GBP/USD surged from around 1.4500 to above 1.4800. As widely expected, the Bank of England cut rates 100bps to 2.00% last night and there was nothing in the accompanying statement to suggest it's finished cutting. We look for the Bank of England to pause in January, but suspect another 50bps cut will likely be delivered. The Riksbank (Sweden) surprised by cutting 175bps to 2.00% (markets were looking for just 100bps). The ECB also surprised by cutting 75bps to 2.50% (markets were looking for a more modest 50bps cut). In the accompanying press conference, ECB President Trichet emphasised that economic growth in the Eurozone was not in free-fall and downplayed the prospect of deflation. It's possible that the anticipated aggressive rate cuts will help bolster investor confidence and global equity markets. But given the backdrop "“ where recent data has shown activity around the world is collapsing and Friday's US non-farm payrolls is expected to show 330,000 job losses "“ we think it's more likely that this week's bevy of rate cuts will be viewed as confirmation about the dire state of the global economy. While investors remain concerned about global recession, and global equities remain under pressure, expect deleveraging flows to continue to underpin USD and JPY. As a result, we suspect EUR/USD will struggle to break above its overnight high of 1.2850 and continue to think the risks are skewed in favour of a visit to the recent lows of between 1.2300-1.2400. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.