By BNZ Currency Strategist Danica Hampton
The NZD/USD has slipped lower over the past 24 hours, pressured by a generally stronger USD and escalating concern about global growth.
While the ECB left rates unchanged at 4.00%, President Trichet left the door open for near-term rate cuts by saying "the "upside risks to price inflation have diminished somewhat" and dropping the usual phrase that current monetary policy settings are appropriate. EUR/USD slipped from above 1.4000 to 1.3750 and this triggered a broad based rebound in the USD.
With the US economy far from a picture of health and the Eurozone and UK on the brink of recession, investors have become increasingly concerned about the outlook for global growth.
The scaling back of global growth expectations has taken a toll on commodity prices. Last night, crude oil prices slipped 4.7% to US$94/barrel, gold prices slipped 3% and the CRB index slipped 4.3%. Yesterday's ANZ commodity price index showed a 4.9%m/m drop in global prices for NZ exports, led by a 7.9% fall in dairy prices. A slide in NZ commodity prices simply adds to the downside risks facing the NZ economy and the NZD.
Despite the US Senate endorsing the revised economic bailout plan (it still has to get past the House of Representatives before it become legislation), anxiety about deteriorating credit markets pressured US stock markets. The S&P500 is skidded 3.6% last night and fragile investor confidence kept the downward pressure on risk sensitive currency pairs like NZD/JPY.
Against a backdrop of a firmer USD, slowing global growth and fragile risk appetite, we expect bounces in the NZD/USD to be limited. For today, we suspect bounces will be limited to the 0.6650-66600 region. Initial support is seen ahead of 0.6525, and solid support is eyed around the 0.6490 region.
Majors
The USD strengthened against the major currencies last night, bolstered by the ECB softening its monetary policy stance and escalating concern about global growth.
As widely expected, the ECB left rates unchanged at 4.00% last night. ECB President Trichet noted the "upside risks to price inflation have diminished somewhat" and failed to confirm that current monetary policy settings are appropriate. Trichet also said "we are totally free to do any time what we feel is necessary", which perhaps suggests the ECB is open to the idea of coordinated central bank action (keep an eye on what happens at the emergency summit in Paris at the weekend). The ECB has clearly left the door open to rate cuts, perhaps even before year-end.
EUR/USD slipped from around 1.4000 to below 1.3750 "“ its lowest level since September 2007. Reportedly, demand from sovereign accounts helped slow the descent in EUR/USD last night. However, with the Eurozone on track to sink into recession in Q3 and the ECB close to cutting interest rates we think the EUR/USD will head lower over coming weeks.
GBP/USD slipped from above 1.7700 to nearly 1.7550 last night and the UK economic backdrop continues to look dreary. Nationwide house prices fell 12.4%y/y in September (down from -10.5%y/y in August) and the construction PMI sank to 38.8 in September (down from 40.5 in August). The Bank of England quarterly lending survey painted a dismal picture of lending in Q3 and it looks likely to worsen over coming months. 20 out of the 35 economists surveyed by Bloomberg expect the Bank of England to cut rates 25bps to 4.75% next week.
The US Senate endorsed the revised US$700b economic bailout plan yesterday, and the next hurdle is getting it past the House of Representatives. Most investors believe some form of the banking bailout bill will eventually be passed, but its difficult to know if the House of Representatives will agree to the current version.
Despite US law-makers progress, worries about the worsening of credit conditions saw US stock markets fall last night. The US economic data simply added to the gloom. Jobless claims rose slightly last week (497,000 vs. 475,000 forecast) and factory orders fell 4%m/m in August (vs. 3.0% forecast). Next clues on the US economy will come from tonight's non-farm payrolls report, where economists are looking for jobs to fall 100,000 an the unemployment rate to push up to 6.1%. The S&P500 is currently down 3.6% and 2-year government bond yields slipped 20bps to 1.63%.
* 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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