Opinion: Kiwi$ dragged higher by global recovery hopes

By BNZ Currency Strategist Danica Hampton The NZD/USD stormed higher last night, propelled by a strong rebound in global equities and investor confidence. Demand for growth sensitive currencies has been bolstered by hopes a slew of interest rate cuts "“ from the Fed, Bank of Japan, China and yesterday's larger than expected 75bps cut from the RBA "“ will help prevent a deep and prolonged global recession. Signs the worldwide measures taken to shore up the banking sector are easing the pressures in global cash and credit markets has also helped underpin investor confidence. A strong surge in Asian equities yesterday set the scene for European and US equities to move higher. The S&P500 is up 3.5% overnight and nearly 20% since the start of last week. Against a backdrop of easing risk aversion and rising equities markets, investors rushed to buy high-yielding currencies like NZD, particularly against "˜safe-haven' currencies like JPY. NZD/JPY climbed from around 58.00 to above 61.00 last night and NZD/USD was dragged above 0.6100 for the first time since October 20. For today, the recovery in equity markets and risk appetite should ensure dips towards 0.5900 attract buyers. Some headwinds are expected ahead of 0.6150, but a sustained improvement in global equities and risk appetite could potentially see a push up towards 0.6250-0.6300 in coming sessions. That said, we'd caution against getting overly bullish towards the NZD/USD. While the recent central bank rate cuts are encouraging, they will not be enough to prevent a global recession. Nor should we forget, as a commodity exporting nation the fortunes of NZ and the NZD are inherently tied to global growth. Yesterday's ANZ commodity price showed NZ is not immune to the worldwide slump in commodity prices. NZ's export index sagged 7.4% in world price terms and is now 11% lower than this time last year. A rebound in global equities, investor confidence and signs on thawing in credit markets saw the USD skid against most of the major currencies last night. EUR/USD surged from below 1.2600 to above 1.3000 and GBP/USD climbed from nearly 1.5600 to above 1.6100. A strong surge in Asian equities (the Nikkei climbed 6% and Korea's Kospi rose 2%), paved the way for a strong day in European and US equities. The FTSE climbed 4.4%, the German DAX rose 5.0% and the S&P500 is currently up 3.6%. At the same time, we've seen an easing in risk aversion. Our risk appetite index has rebounded from last week's low of 4% to nearly 20% (although it's still well below the long-term average of 50%). Investor sentiment has been cheered by hopes bold interest rate cuts by central banks around the world will help prevent a deep and prolong global recession. We've seen interest rate cuts in the US, China, India Hong Kong, Taiwan, South Korea Japan and yesterday the RBA cut interest rates 75bps to 5.25%. The ECB is expected to cut rates by 50bps to 3.25% this week and our UK economists expect the Bank of England to cut 100bps to 3.50% (market expectations are centred on 50bps move). There are signs that the bold action by government and central banks is starting to have some effect on credit and cash markets. Since the start of last week, the S&P500 is up nearly 20%; the yield spread between emerging market bonds and US Treasures has narrowed 220bps; and the US 3-month libor to OIS spread (a measure of bank funding costs) narrowed 80bps. While market participants chose to view the glass as half full, last night's economic news wasn't too impressive. Ratings agency Fitch warned "that the world's major advanced economies - US, UK, Euro area and Japan - will next year experience the steepest decline in GDP since World War II. In aggregate GDP growth in these countries is expected to be (minus) -0.8% in 2009, compared to an estimated 1.1% for 2008. " ECB council member Weber said the German economy is "under pressure" and growth is unlikely to improve for some time. And US factory orders fell 2.5% in September, well below forecasts of -0.8% * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.