Opinion: Weak global stocks dragging on Kiwi$

By BNZ Currency Strategist Danica Hampton The NZD/USD has spent most of the night trading choppily within a 0.5950-0.6100 range. Early on, NZD/USD was dragged lower by weakness in EUR/USD and GBP/USD after soft UK data weighed on UK and European equities. The UK FTSE closed down 2.3% and the German DAX fell 2.11%. But NZD/USD was lifted off its 0.5950 low by a bout of USD selling later in the session. Not only did the ADP employment index fall 157,000 in October (implying downside risks to Friday's non-farm payrolls report) but the non-manufacturing ISM fell to 44.4 -its lowest level since 1997. While the NZD/USD quickly surged above 0.6100, the gains were short-lived. Fears about a US recession also reignited concerns about global growth, which combined with a slide in US equities; encouraged some selling of growth sensitive currencies like NZD. For today, the backdrop of weak global equities and concern about a slow-down in US and global growth should ensure that bounces in NZD/USD are limited. Today's NZ labour market data should also add to the weight on NZD/USD. While Monday's wage data was relatively robust, we expect the trend of moderating employment to continue in today's HLFS. We look for employment to ease 0.2%q/q and the unemployment rate to edge up to 4.2% (well above the 3.9% seen in Q2). We suspect bounces towards 0.6100 will attract sellers. Initial support is seen ahead of 0.5950, but soft HLFS data or heavy losses in Asian equities have the potential to see NZD/USD push lower. Also keep an eye out for the Australian jobs data (due 1:30 NZ time). Jobs likely fell 10,000 in October, which would see the unemployment rate nudge up to 4.4%. The USD edged lower against the major currencies last night, but it was a choppy night as markets tried to digest the mix of soft UK and US data, weaker European and US equities and Obama's clear victory in the US election. Early in the night, soft UK data and worries about impending ECB and Bank of England interest rate cuts weighed on EUR and GBP. The official measure of UK manufacturing output fell 0.8% in September. Meantime, the UK services PMI fell to 42.4 in October "“ the sixth consecutive month below the 50 threshold signalling a contraction. With UK activity slowing sharply and inflation pressures dissipating, we think the Bank of England will cut interest rates by at least 100bps to 4.50% tonight (and continue cutting over the coming months until the cash rate is at least as low as 2.50%). Losses in European equities (the FTSE closed down 2.3% and the DAX fell 2.11%) also encouraged a bit of EUR/JPY and GBP/JPY supply. EUR/USD slipped to around 1.2800 and GBP/USD sank to around 1.5800. However, EUR/USD and GBP/USD rebounded sharply after awful US data triggered a bout of USD selling. The ADP employment index fell 157,000 in October, suggesting some downside risks to Friday's non-farm payrolls report. The non-manufacturing ISM (which covers about 90% of the economy) dropped to 44.4 "“ its lowest level since 1997. Vague rumours suggesting that sovereign accounts were selling USD circulated; EUR/USD spiked from around 1.2850 to above 1.3100 and GBP/USD surged from 1.5800 to 1.6200. With considerable downward momentum in the US economy, it's not clear that the clear victory for President-elect Obama and the Democrats will make much difference to the evolution of the US economy over the next year or so. Last night's US data suggests there is plenty to worry about on the economic front and the S&P500 is currently down 3.66%. It's worth remembering, a deep and prolonged US recession will also be bad news for global growth. As fears about a US and global recession resurface, expect equity markets around the world to suffer and risk aversion flows to underpin the USD and JPY. That said, while uncertainty about the global outlook persists, expect currencies to continue taking their cues from fluctuations in global equities. The next key global events will be monetary policy decisions. The ECB is expected to cut 50bps to 4.00% and we look for the Bank of England to cut 100bps to 3.50% (although market consensus is for a 50bps cut). * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.