Opinion: Kiwi$ falling on global, Australian recession fears

By BNZ Currency Strategist Danica Hampton The NZD/USD skidded overnight, from above 0.6000 to within a whisker of 0.5800. NZD/USD was driven above 0.6000 yesterday by hopes the newly approved Chinese US$586b spending plan will help prevent a prolonged global recession. The backdrop of surging Asian equities (most indices climbed 4-7% across the board) triggered solid demand for NZD/JPY from a range of model accounts and speculative players. There was some chatter suggesting the World Bank's NZ$408m uridashi bond may have helped NZD sentiment. However, we doubt this had much effect. There is nearly NZ$2b worth of maturities this month, so we'll need to see a lot more issuance before it starts to have a positive effect on NZD. Nonetheless, the global optimism proved to be short-lived. While US equities opened strongly, a string of bad news (including a recasting of the AIG rescue package and HSBC's US$4.3b provision to cover losses in its US unit) saw US equities erase their earlier gains and the S&P500 is currently down 1.5%. The slide in US equities, combined with an AFR article (from noted RBA watcher Alan Mitchell) warning the Australian economy was unlikely to avoid recession, triggered a heavy slide in both AUD and NZD. AUD/USD plunged about 4% to below 0.6700 and NZD/USD sank about 3.6% to nearly 0.5800. 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 0.5900. Initial support is seen around 0.5790-0.5800, but a break below this level will see a pull-back towards 0.5750. Majors The USD edged higher against most of the major currencies last night as the Chinese stimulus package failed to soothe worries about a global recession. China approved a US$586b spending plan to bolster growth and announced a shift to "moderately easy" monetary policy over the weekend. Investors hoped a rebound in Chinese growth, combined with last week's aggressive central bank rate cuts, would help prevent a deep and prolonged global recession. Asian equities staged a strong recovery, commodity prices surged and we saw renewed demand for growth sensitive currencies like JPY crosses. Asian equity indices climbed 4-7% across the board, the DAX rose 1.76% and the FTSE rose 0.9%. Solid demand for EUR/JPY saw EUR/USD climb from around 1.2800 to above 1.2900. However, the global optimism didn't last long. While US stocks opened in positive territory, before long they had erased all their early gains. Mortgage insurance giant Fannie Mae posted a record US$29b Q3 loss. The US government overhauled its bailout plan for AIG and will now purchase US$40b of the company's stock. HSBC surprised investors by setting aside US$4.3b to cover bad loans in its America unit in Q3. Heavy losses in financial stocks took a toll and the S&P500 is currently down 1.5%. The reversal in US stocks triggered a heavy slide in JPY crosses and this tended to underpin the USD. EUR/JPY plunged from above 128.00 to below 125.00 and EUR/USD was dragged below 1.2750. Comments from Trichet suggesting the ECB could not cut rates as aggressively as the Fed also added to the pressure on EUR. Trichet is clearly coming under pressure for "only" cutting rates 50bps last week and justified the move by saying "we are not in the same situation "¦ some have a very good handling of inflation expectations"¦ others still have to cope with inflation pressures". Selling of GBP/JPY also weighed on GBP/USD, which fell from above 1.5800 to nearly 1.5600. The IMF warned the UK will suffer the steepest decline in economic growth in the G7 in 2009 and this did little to help GBP sentiment. This week's economic data will likely highlight fears about slowing global growth. Friday's Eurozone Q3 GDP reading should confirm the region is in recession. In the UK, the main focus will be the BoE's Inflation Report (Wednesday). 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. While currencies will continue taking near-term cues from global equity markets, lingering fears about a global recession should provide some support for USD and ensure bounces in EUR/USD and GBP/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.