By BNZ Currency Strategist Danica Hampton
The NZD/USD spent the night trading choppily within a 0.5800-0.6050 range.
The local currency continues to be caught up in the global melee. Over the past day or so, investor confidence has been bolstered by a slew of interest rate cuts "“ including the Fed, China and Hong Kong "“ and anticipation of further cuts from the Bank of Japan (decision today) and the ECB and Bank of England (decision next week).
The IMF's new funding programme designed to help liquidity in emerging market and the Fed's extension of swap facilities to Brazil, Mexico, South Korea and Singapore also helped shore up confidence in emerging economies.
During the first part of the night, the global backdrop of improving investor confidence and recovering equities underpinned NZD/USD as market participants continued to unwind last week's risk aversion-inspired trades. The NZD/USD climbed above 0.6000 last night, and has now erased about 75% of last week's huge sell-off from 0.6250 to 0.5350.
However, NZD/USD was knocked off its highs as night progressed. Relatively soft US GDP data (it contracted -0.3%q/q in Q3) and a very weak German IFO business confidence survey reignited fears about a global recession. Some USD buying also emerged as market participants' position themselves in anticipation of huge month-end demand for USD at tonight's London fix.
Locally, the news remains dreary. Yesterday's NBNZ business confidence survey showed that business optimism has fallen to record lows and this suggests downside risks to our GDP forecasts for 2009.
For today, a solid performance from global equity markets and recovering risk appetite should provide some support for NZD/USD. However, lingering fears about a global recession and month-end demand for USD should ensure bounces are limited to the 0.6000-0.6050 region. Initial support is seen around 0.5780-0.5800.
It's been another choppy night in major currency markets. During the first part of the night, recovering equities and rebounding risk appetite saw both USD and JPY weaken further. However, the USD recovered later in the session after soft US GDP reignited global recession fears and market participants started positioning themselves for month-end flows.
Early in the night, hopes that interest rate cuts will help bolster the global economy helped underpin confidence again last night. Interest rate cuts were seen by the Fed, China, Norway, Hong Kong and Taiwan yesterday. And market participants anticipate rate cuts from the Bank of Japan today and the ECB and Bank of England next week.
The IMF announced a new emergency funding programme, designed to get money quickly to emerging "countries with strong economic policies that are facing temporary liquidity problems". And the Fed announced it would lend US$30b each to central banks in Brazil, Mexico, South Korea and Singapore in an attempt to meet demand for USD in emerging markets.
Strong gains were seen across Asian equities "“ the Nikkei climbed 9.9%, the Hang Seng rose 12.8% and the Shanghai index rose 2.5%. The backdrop of improving investor confidence and recovering equities saw USD and JPY weaken further as investors reversed last week's risk aversion-inspired trades. EUR/USD climbed above 1.3300 last night and has now all-but corrected the bulk of last week's massive sell-off (which saw the currency plunge from 1.3525 to 1.2325).
But the euphoria didn't last long. Relatively soft US GDP (it contracted 0.3%q/q in Q3) and comments from the Fed's Yellen (warning the US economy would contract "significantly" in Q4) reignited fears about a US and global recession. And market participants started positioning themselves in anticipation of month-end flows. The MSCI World Index fell 21.8% in October and month-end currency hedge rebalancing is expected to produce heavy demand for USD at tonight's London fix. Before long, EUR/USD slipped from around 1.3250 to nearly 1.2800 "“ what's a 4 ½ cent range between friends?
With further monetary policy easing expected over the week ahead, we may see JPY and USD weaken further in the near-term. However, we are not convinced the world is suddenly a better place. The recent central bank rate cuts will not be enough to prevent a global recession, and so we suspect global de-leveraging flows will continue to support the USD and JPY over coming months.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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