Opinion: Recession fears may drive Kiwi$ lower soon

By BNZ Currency Strategist Danica Hampton NZD/USD has edged lower over the past 24 hours, pressured by fears about the global growth outlook. While the worldwide measures taken by government should eventually shore up the financial sector, investors are worried this will not be enough to prevent a global recession. Last night, Fed Chairman Bernanke warned the US economy would take time to recover, even if financial markets stabilise "as we hope they will". Fears about a global recession prompted a sharp slide in global equities and risk aversion. Asian equities slipped 2-4%, European equities fell 6-7% and the S&P500 is currently down 6.5%. Our risk appetite index is currently sitting at 19% - well below the 50% long-term average and in risk aversion territory.

Other leading indicators of global growth like commodity prices also dived last night. The Baltic Dry Index (a measure of international freight and shipping activity) slumped 11% and the CRB index (a broad measure of commodity prices) fell 4.5%. Worries about the global growth outlook took a toll on growth sensitive currencies like NZD, particularly against "˜safe-haven' currencies like JPY. NZD/JPY slipped from around 63.50 to below 61.00, and NZD/USD was dragged from above 0.6250 to below 0.6100. Lingering uncertainty about the global outlook has produced extreme volatility across all asset classes and NZD/USD has been no exception. In the near-term, while this uncertainty persists, expect NZD/USD to take cues from global equities and trade choppily within a 0.5785-0.6400 range. For today, the weakness in US stock markets and risk aversion will likely keep the NZD/USD heavy. Expect bounces to be limited to the 0.6140-0.6150 region. On the downside, initial support is seen ahead of 0.5990-0.6000. But escalating concern about a global recession has the potential to see NZD/USD re-test its October 8 low of 0.5785 in coming sessions. Despite worldwide efforts to stabilise financial markets, investors are increasingly concerned that the global economy is headed for recession. In currency markets, these fears about a global recession tended to underpin the USD and weigh on JPY crosses last night. Fed Chairman Bernanke warned the US economy was headed towards an extended period of difficulty, even if financial markets stabilise "as we hope they will". And last night's US data did nothing to alleviate these concerns. Advanced retail sales fell 1.2%m/m in September (vs. -0.7% forecast) as consumers ratcheted back spending for a third consecutive month. The Empire manufacturing index sank -24.6% (vs. -10% forecast) and business inventories climbed just 0.3% (vs. 0.8% forecast). Meanwhile, economic growth elsewhere in the world is looking just as dreary. Last night's UK data showed a marked deterioration in the labour market. While the level of the claimant count rose by less than expected (31,800 vs. 36,000 forecast), the level of employment fell by 122,000 "“ the biggest drop since February 1993. The broader ILO measure of the unemployment rate rose from 5.5% to 5.7% in August, and the UK unemployment rate looks likely to head towards 7.0% in 2009. Fears about a global recession were reflected in sharply lower global equities and commodity prices. The FTSE fell 7.16%, the German DAX slipped 6.49% and the S&P500 is currently down 6.5%. Meantime, the CRB index (a broad commodity price index) fell 4.5% and the Baltic Dry Index (an international freight and shipping index) slumped 11%. While EUR/USD climbed to nearly 1.3700 early in the offshore session, the gains were short-lived. Sliding equities, falling commodity prices and risk aversion encouraged selling of JPY crosses. Our risk appetite index (which has a scale of 0-100%) is currently sitting at 19% - while slightly above last week's 15% low it is still well below the long-term average of 50%. Steady selling saw EUR/JPY slide from above 139.00 to below 136.00 and EUR/USD skidded to nearly 1.3500. Looking forward, we suspect the USD and JPY will remain well supported over the coming months. While the measures undertaken by various governments should eventually shore up the financial sector, they are unlikely to prevent a global recession. Against a backdrop of slowing global growth, we'd expect investors to shift into more traditional markets and more traditional asset classes. And these repatriation flows are expected to benefit both the USD and JPY.   * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.