Opinion: Kiwi dollar drops on global recession fears

By BNZ Currency Strategist Danica Hampton NZD/USD has fallen over the past 24 hours, pressured by renewed fears about the health of the global economy. China's PMI slumped to 38.8 in November (vs. 44.6 in October) prompting concern growth in China may be slowing more sharply than anticipated. The soft Chinese data was quickly followed by terrible PMI data out of both the UK and the Eurozone. European equity indices fell more than 5% and the S&P500 is currently down more than 6%. Renewed concern about a deep and prolonged global recession encouraged investors to ditch growth sensitive currencies like NZD in favour of "˜safe-haven' currencies like USD and JPY. NZD/JPY slipped from above 52.00 to below 50.00 and NZD/USD was dragged down below 0.5350. After being relatively optimistic last week, market participants are now viewing the glass as "half empty". It looks increasingly likely that this week's slew of interest rate cuts will be viewed as simply confirming the dire state of the global economy. While these global recession fears prevail, and global equities remain under pressures, expect NZD/USD to remain heavy. For today, we suspect bounces in NZD/USD will be limited to 0.5380-0.5400. Some support is eyed around the overnight low of 0.5325, but continued pressure on global equities will likely see NZD/USD slip lower. A retest of November's sub-0.5200 lows looks likely in coming sessions. Events across the Tasman will be watched carefully today. Australia's current account balance and retail sales data will be released at 1:30pm, but the key focus will be the RBA decision due at 4:30pm. While Australian media has talked up the possibility of 100bps, most economists are looking for a 75bps cut to 4.50%. The USD and JPY strengthened against most other currencies last night after weak PMIs out of China, Eurozone and the UK reignited global recession fears. China's PMI fell to 38.8 in November, well down on the 44.6 seen in October. Overall, the release was probably consistent with the Chinese economy growing at around 6.0% (well below even the most pessimistic forecasts). The soft Chinese data prompted fears the global slow-down may be worse than anticipated and encouraged investors to shun growth sensitive currencies in favour of the JPY and USD. Then markets were hit by equally unimpressive data out of the Eurozone and UK. The Eurozone manufacturing PMI fell to 35.7 in November, down from October's 36.7. A closer look at the detail suggests the slow-down in activity is broad based and unlikely to improve any time soon. In the UK, the manufacturing PMI fell to 34.4 in November "“ a record low "“ and well below the 40.7 seen in October. The very sharp drop in activity is consistent with the Bank of England cutting aggressively this week (our UK economists expect a 100bps cut). The lacklustre European data intensified the pressure on GBP and EUR and European equities dived about 5%. Market commentators suggest leveraged funds and quasi-sovereign names were active sellers of GBP and EUR last night. EUR/USD slipped from above 1.2700 to below 1.2600 and GBP/USD skidded more than 3% from around 1.5400 to nearly 1.4800. Across the Atlantic, things aren't looking any better. Not only did the NBER confirm the US economy entered recession in December 2007, but the manufacturing ISM skidded to 36.2 in November (from 38.9 in October) "“ its worst monthly reading since 1982. Renewed fears about the health of the global economy, combined with heavy losses in financial stocks, saw US equity markets plunge. The S&P500 is currently down 6.3%. After being relatively optimistic last week, investors have ditched the rose-tinted glasses. It looks increasingly likely this week's bevy of large interest rate cuts (RBA, RBNZ, BoE and ECB are scheduled to meet and the BoJ has just announced an emergency meeting this week) will be simply viewed as just another warning 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. For EUR/USD, this suggests a visit to the recent lows of between 1.2300-1.2400 is likely before we see a rebound. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.