By BNZ Currency Strategist Danica Hampton NZD/USD skidded from above 0.6000 to nearly 0.5500 last week, pressured by worries about the health of the US economy. See currency charts here. NZD/USD spiked above 0.5750 on Friday morning, bolstered by Thursday night's monster rally in US equities. However, the strength proved to be short-lived. A record 2.8% drop in US retail sales in October sparked fears the US slow-down would be deeper and more prolonged than anticipated and the S&P500 fell 4.17%. Across the Atlantic, Eurozone GDP contracted 0.2%q/q in Q3 confirming the region is technically in recession. Renewed fears about a global recession and the heavy losses in US equity markets put growth sensitive currencies like the NZD under pressure. Before long, NZD/USD was back below 0.5550.
Over the weekend, the G20 agreed to work together to revive the global economy. While the united front is encouraging, many of suggested measures reflect actions already undertaken by countries. The thornier issues of how to reform financial regulation have been put off until the next meeting 30 April. Overall, nothing has really changed and there is still no quick fix to the global slow-down. The outlook for global growth remains the key driver of NZD/USD. While the united front from the G20 and the recent slew of central bank rate cuts are somewhat encouraging, there is still plenty to worry about. While the uncertainty about the global outlook persists, we expect NZD/USD to continue taking its cues from global equity markets. Over the coming week, we suspect NZD/USD will struggle to push back towards last week's 0.6050 high. On the downside, solid support is eyed around 0.5490-0.5500, but a convincing break below this level will open up the downside towards October's 0.5350 low. Ongoing uncertainty about the global outlook and sharp changes in investor sentiment saw global equities and currencies whip-sawed violently last week. The optimism that lingered through much of our day on Friday (following Thursday night's massive surge higher in US stocks) proved to be fleeting. US retail sales fell a record 2.8%m/m in October, which sparked fears that sluggish household consumption would mean the US economic down-turn would be deeper and more prolonged than currently anticipated. Even encouraging comments from US Treasury Secretary Paulson, who said the US Treasury's US$700b TARP plan had stabilised financial institutions, couldn't buoy investor confidence. The S&P500 fell 4.17% on Friday night, and finished the week down nearly 2%. The heavy losses in US equities and renewed worries about a global recession tended to support USD and JPY at the expense of growth sensitive currencies. GBP/USD slipped from nearly 1.4950 to below 1.4750 and EUR/USD skidded from around 1.2800 to below 1.2600 (although still well above Thursday's sub-1.2400 low). EUR sentiment wasn't helped by data confirming that the Eurozone is in recession. Eurozone GDP contracted 0.2%q/q in Q3 (following up 0.2%q/q drop in Q2). The annual growth rate has halved from 1.4% to 0.7%, its lowest level since September 2003. Over the weekend, the world leaders that comprise the G20 meeting agreed to work together to revive the global economy. The G20 issued statement of general principals which promised action on a number of fronts, including fiscal stimulus, global trade deals to guard against protectionism and a reform of financial regulation. We can't help but think the meeting was largely window dressing. Many of the measures reflect actions countries have already taken to shore up their economies. Central banks have already engaged in a round of interest rate cuts, and many national governments have discussed plans for new stimulus spending to spur growth. The more difficult decisions on how to reform financial regulation has been put off until the next meeting 30 April. There is no quick fix to the global slow-down and while uncertainty about the global outlook persists expect currencies to continue taking their cues from global equity markets in the near-term. However, lingering fears about a global recession should continue to underpin USD over coming months, ensuring bounces in EUR/USD are limited. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.