Opinion: Global recession fear presses on NZ$

By BNZ Currency Strategist Danica Hampton The NZD/USD has spent the past 24 hours consolidating within a 0.5500-0.5650 range. Ongoing fears about a global recession are keeping the downward pressure on growth sensitive currencies like the NZD. Overnight, a contraction in German Q3 GDP confirmed that Germany is in recession and tonight's Eurozone GDP will likely tell the same story about the broader Eurozone region. The OECD also downwardly revised its global growth projections. Not only did it cut its growth forecasts for the US, Japan and Eurozone, but it warned that the 30-country OECD area would likely contract in 2009. While Asian and European equity markets stabilised a bit last night, US stocks skidded sharply after Wall Mart's downbeat assessment of the Q4 outlook. At one point the S&P500 was down nearly 4% and this saw NZD/USD test support ahead of the 0.5500 region. While the S&P500 has rebounded off its lows, the index is still down nearly 10% since the start of the week. The local news has done little to help NZD sentiment. October's REINZ report showed house sales fell 35%y/y and median house prices stabilised around NZ$335,000 (which is down 4.3%y/y). The BNZ Business PMI printed at 43.5, below the 50-threshold that signifies a contraction for the sixth consecutive month. Q3 retail sales volumes fell 0.9%q/q (albeit not quite as dire as the -1.3%q/q forecast) and overall the NZ economy looks on track to contract 0.5%q/q in Q3. The outlook for global growth remains the key driver of NZD/USD. While there is plenty of bad news still about, we may see some optimism filter through the market ahead of the weekend's G20 meeting. In the near-term, expect NZD/USD to continue taking its cues from global equity markets. Solid support is expected on dips towards 0.5490-0.5500 and some headwinds are likely ahead of the 0.5650 region. It was another night of familiar themes. Both the USD and JPY pushed higher against the major currencies last night supported by ongoing fears about the global recession and further weakness in global equity markets. EUR/USD traded choppily within a 1.2400-1.2600 range last night as recession became a reality in Europe's biggest economy. German GDP fell 0.5%q/q/ in Q3, well below forecasts for a -0.2% drop, confirming the economy is in recession for the first time in five years. The softer than expected German GDP data doesn't bode well for tonight's Eurozone GDP release, which is expected to contract 0.2%q/q and confirm the entire Eurozone region is in recession. GBP/USD fell below 1.4700 to a 6½ -year low amid fears a deepening UK recession will see the Bank of England slash interest rates further in coming months. Yesterday Bank of England Governor King said he was "prepared to cut bank rates to whatever level is necessary" and recent UK data has done little to improve sentiment. Ahead of this weekend's emergency G20 meeting, the OECD has released updated global projections. Not only did the OECD cut its growth forecasts for the US, Japan and Eurozone, but it warned that the 30-country OECD area would likely contract in 2009. Comments from George Soros (who was testifying before a Government hearing on financial market oversight) simply added to the global malaise. Soros warned that "a deep recession is now inevitable and the possibility of a depression cannot be ruled out." US stock markets continued falling last night, pressured by global growth concerns and further weakness in the US retail sector. Wall Mart reported a 10% increase in Q3 profits, but its outlook for the coming quarter was downbeat. The S&P500 has now broken below the lows seen in early October and is currently down nearly 10% since the start of the week. G20 officials are meeting in Washington this weekend to plot a coordinated response to the economic crisis. 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. However, there is no quick fix to the global slow-down and we continue to think fears about a global recession and risk aversion will continue to underpin USD and JPY in the near-term. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.