Opinion: Global tensions grow, dragging NZ dollar down

By BNZ Currency Strategist Danica Hampton The NZD/USD has slipped further over the past 24 hours, from above 0.5850 to below 0.5700. Renewed fears about a global recession and heavy losses in global equity markets kept the NZD under selling pressure last night. The UK DCLG house price index slipped 5.1%y/y in September (down from -3.4% in August) further fuelling fears the UK is in recession. While the German ZEW business sentiment index surprised on the upside, the current conditions index continued to decline rapidly. The Nikkei fell 3%, the FTSE fell 3.6%, the DAX fell 5.2% and the S&P500 is currently down 2%. Emerging economies were also hit hard last night. Fears about RUB devaluation saw investors bail out of Russian assets. The Russian equity market fell 13% before trading was halted and the RUB fell 1% against the USD "“ to its lowest level since February 2006. It is interesting to note, that reduced appetite for emerging market assets has seen several Japanese Investment Fund launches cancelled over the past few weeks. Escalating risk aversion and the slide in commodity prices encouraged selling of growth sensitive currencies like NZD in favour of the relative safely of USD and JPY. NZD/JPY plunged from above 57.50 to below 55.50 and NZD/USD was dragged below 0.5700 for the first time since October 29. The outlook for global growth remains the key driver of NZD/USD. While we've had some positive news, there is still plenty to worry about. While uncertainty about the global outlook persists, expect the NZD/USD to continue trading choppily taking its cues from global equities. For today, the backdrop of soft equity markets should ensure bounces are limited to 0.5800. Initial support is seen around 0.5690-0.5700, but a break below this level will likely see a pull-back towards solid support around 0.5500. Keep an eye out for the RBNZ semi-annual Financial Stability Report (9:00am NZ time). Renewed fears about the health of the global economy and a melt-down in emerging market economies saw the USD and JPY climb against most currencies last night. Heavy losses were seen across global equity markets. Fannie Mae said it may need further capital injections from the US Treasury, American Express announced it would convert to a bank holding company and there is continued discussion about how to rescue the US car makers. The Nikkei fell 3%, the FTSE fell 3.6%, the DAX fell 5.2% and the S&P500 is currently down 2%. Risk aversion flows also battered Russian equities and the RUB last night. The Russian stock market fell 13% before the exchange halted trade. The RUB fell more than 1% against the USD "“ to its lowest level since February 2006 - after the central bank widened its target range for the RUB. And the Russian central bank lifted its refinancing rate from11% to 12% in effort to reduce some of the capital outflows. The melt-down appears to have been triggered Russia's central bank chief Ignatiev warned there was "a high risk for ruble devaluation" in the order of 10-15% "if oil prices fail to recover above $70 a barrel" in coming months. In currency markets, risk aversion encouraged investors to bail out of growth sensitive currencies in favour of the relative safety of USD and JPY. EUR/JPY plunged from 125.00 to below 122.00 and EUR/USD was dragged from above 1.2750 to below 1.2550. And GBP/USD skidded from above 1.5650 to below 1.5400. Early in the night, the German ZEW business sentiment index surprised on the upside, climbing to -53.5 in November from -63.0 in October. However, the improvement in confidence appears to be technical in nature and the current situation index has continued to decline rapidly (falling to -50.4 in November from -35.9). Friday's Eurozone Q3 GDP reading should confirm the region is in recession. Weak UK housing and retail sales surveys further fuelled the view that the UK is in recession, but investors are waiting for tonight's tonight's BoE's Inflation Report. Given last week's 150bps rate cut, we expect the BoE has taken a razor to its GDP forecasts and probably has growth falling to at least 1% next year. Expect currencies to continue taking near-term cues from global equity markets, but lingering fears about a global recession and risk aversion should continue to support USD and JPY. As such, EUR/USD and GBP/USD will likely remain under pressure and we look for a re-test of October's 1.2330 and 1.5270 lows in coming weeks. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.