Opinion: Why the NZ$ hit a 6 year low and where to from here

Opinion: Why the NZ$ hit a 6 year low and where to from here
BNZ Currency Strategist Danica HamptonBy BNZ Currency Strategist Danica Hampton NZD/USD skidded sharply last week, falling from above 0.5600 to a 6-year low of around 0.5200. The local currency was pressured by deepening gloom about the global economy, which triggered heavy losses across equity markets and fears about global deflation. A back-to-back pummelling saw the S&P500 fall to an 11-year low on Thursday and our risk appetite index (which has a scale of 0-100%) plunged to 9% from around 20%. Early on Friday night, investment bank selling pressured NZD/USD below 0.5250. However, a strong rebound in US equities (the S&P500 closed up 6.32%) and a surge higher in the AUD (probably helped by buying from the RBA) saw the NZD/USD stage a bit of a recovery. A break above 0.5350 triggered a run of stop-loss buying and NZD/USD was squeezed up to nearly 0.5400. Over the coming week, the outlook for global growth will remain the key influence on the NZD/USD. A sustained recovery in global equities and risk appetite has the potential to squeeze the NZD/USD back up towards 0.5600. However, it is important to remember, there is no quick-fix for the troubles pressuring the global economy, which combined with lacklustre local data and expectations of aggressive RBNZ rate cuts, should ensure bounces in NZD/USD are limited. Locally, this week's data should continue to tell a story of woe. Expect to see some signs of easing in the RBNZ and Marketscope inflation expectations (in line with recent falls in food and petrol prices). October's trade deficit will likely widen further and residential building consents will likely tell of a struggling new housing market. And activity, investment and employment indicators in November's NBNZ business survey will likely be consistent with an extremely weak economy. On the downside, expect some support around 0.5225-0.5250. A convincing break below 0.5200 is needed to suggest the downtrend is gaining momentum again. The USD slipped against the major currencies on Friday night as US equities stormed higher and investors welcomed reports that President-elect Obama had chosen a new Treasury Secretary, instilling confidence about the administration's ability to take action. US equities were pummelled last week, which saw the S&P500 sink to an 11-year low on Thursday. However, on Friday, equities shot higher following news that Timothy Geithner, President of the Federal Reserve Bank of New York, would be nominated as the US Treasury Secretary. While the S&P500 closed up 6.32% on Friday, it still ended the week 8.4% lower than where it started. Over the weekend, President-elect Obama announced he was crafting an aggressive two year stimulus package to revive the US economy. Obama warned "if we don't act swiftly and boldly, most experts now believe that we could lose millions of jobs next year" and cautioned about the risk of falling into a "deflationary spiral that could increase our massive debt even further". Officials from Citigroup, the Fed and Treasury also met over the weekend in effort to come up with a plan to stabilise the beleaguered US banking giant. However, CNBC reports that officials are yet to come up with a rescue plan and the situation is "daunting" due to Citigroup's size and scope. This week's data will likely reinforce the sorry state of the global economy. Germany's IFO should prove as weak as the recent ZEW survey and put pressure on the ECB to lower rates next week. In the UK, the pre-budget will likely show radically lower UK growth forecasts and much higher government borrowing "“ leaving the door open for a 100bps rate cut when the Bank of England meets in December. There is also plenty of US data due out this week (including existing and new home sales and the Richmond Fed and Chicago PMIs), but markets will be closely watching news from US President-elect Obama and developments on the Citigroup front. If the markets are encouraged by the in-coming US President, or a comprehensive Citigroup bailout package is announced, we may see a knee-jerk rebound in global equities, USD/JPY and JPY crosses early this week. However, we would caution against getting overly optimistic. There is no quick-fix to the troubles facing the global economy and worries about a deep and prolonged global recession will likely continue to support the USD and JPY over coming months. In the near-term, currency markets will be left watching global equities for cues. * 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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