Opinion: NZ dollar dips below 53 USc as global fear returns

By BNZ Currency Strategist Danica Hampton Risk aversion has intensified, the VIX as we open this morning above 77.5, which is some 16% higher than at the start of the week. Equity markets across Asia shed 5-7% on the most part in response to the S&P trading to 5 year lows yesterday and European bourses have lost a further 3-5% in overnight trade. Not surprisingly then to find the NZD has traded lower, breaching last months lows at the 0.5350 level and trading below the 53 cent level for a time offshore. Yesterday the RBA in their usual reporting to markets confirmed their "smoothing" intervention of past weeks totalled a shade over A$3.0bio. In trading last evening they again were noted for a time, however, once they stepped away the market rushed lower and the A$ without their support lost some ground on cross rates. The NZDAUD trades this morning marginally firmer at the 0.8580 level, after touching 0.8450 earlier this week. There will be some attention today of course on the update to Fonterra's payout for the current season, an update which will refocus media and analyst attention on the outlook for NZ into 2009. Our own economists most recent update, (Nov 20), observes that the current recession is hitting us in two stages. Stage one, led by the collapse in the housing market and centred on sharp falls in household spending. is largely behind us. But stage two is now well underway: global growth is slumping, with farm incomes and tourist flows to take a hit as a result, investment activity will falter and the unemployment rate will rise quickly. All of this suggests things will get worse before they get better. Accordingly, they now see growth of just 0.3% in 2009. For all this though, they believe there are a growing number of events that will see the economy clamber its way back to solid footing by 2010. Chief amongst these is the substantial monetary and fiscal easing already underway, combined with falls in living costs. Put all this together and you've got a big hike in effective spending power. There is no doubt in our minds that 2009 will be extremely difficult for many. But as the skies darken further, it's important to recognise that the groundwork for the inevitable end to the recession is already underway. With this in mind there can be little change to our core view that the NZD/USD remains hostage to global events. Confirmation of recessions in various regions (including Japan, Germany and the euro-zone) during the past fortnight has tended to keep downward pressure on growth-sensitive currencies. NZD sentiment has been further undermined by local news, which continued to tell of a struggling New Zealand economy.  As we look to the end of the week there will be attention this morning on a 230pm EST (830am NZ time) press conference from Capitol Hill that will provide an update on the hoped for bail-out of the US automakers. Just the announcement of the press conference has helped push the US equity markets into positive territory "“ though intra day sentiment is flighty. On the day we'll suggest the 0.5225/0.5250 level could provide support for the beleaguered NZD, while resistance forms on any extension closer to 0.5425/0.5450 in the near term. Another night of gloom to report, though watch that press conference from Capitol Hill for any notable influence on the US equity markets and subsequently our Friday in Asia. Overnight there was a surprise easing of 100bp by the SNB, which caught the market unprepared and commentary from the SNB's Roth suggests they stand ready to easer again if required. Elsewhere, monthly UK retail sales data passed without much fanfare (-0.1% for October) though in contrast the release of weak US Initial Jobless claims at 542k (prev 515k) and continuing claims at 4,012k (prev 3,903k) was alarming. The number of Americans filing for unemployment benefits is approaching a 26 year high and if that wasn't bad enough for one day the PHILLY Fed index (a measure of Mfg activity) fell to 18 year lows when it printed at -39.3 (prev -37.5). The outlook for future performance was coloured all shades of black and gloom with the Leading Indicators Index printing at -0.8% (prev -0.1%). * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.