Opinion: The devil's in the detail of the Big Bailout plan
29th Sep 08, 8:21am
By BNZ Currency Strategist Danica Hampton The NZD/USD spent most of Friday within a 0.6800-0.6900 range. While the NZ GDP release confirmed the economy is in recession, the currency was caught up in the uncertainty around whether, and in what form, US law-makers will agree on the Bush Administration's proposed bank bailout package. The NZD/USD received an extra boost when US GDP printed at an annualised pace of 2.8%, well below the 3.3% forecast, and pushed up to around 0.6900. Over the weekend, the Wall St Journal reported that US lawmakers hope to announce an agreed bailout package before Asian markets open today. If an agreed bailout package is announced, expect countervailing forces to play on NZD/USD. Expect to see a knee-jerk rally in global equity markets and an improvement in investor confidence will likely underpin crosses like NZD/JPY. Meantime, the USD will also likely get a boost (as it did every time last week when it looked like Congress was close to agreeing on a deal) and a stronger USD will likely limit the topside in NZD/USD. While the global themes of USD sentiment and risk appetite will likely be the predominant driver of the NZD this week, the local backdrop is unlikely to be currency supportive. While Q2 GDP printed at -0.2%q/q a tad better than expected, we believe the positive surprise was about timing rather than substance. Accordingly, we've lowered our Q3 GDP pick to -0.5% in compensation, leaving our overall track largely unchanged and with it our view on monetary policy. This week's NBNZ business confidence will likely bounce (in line with recent surges in consumer confidence), but indicators of activity, employment and investment intentions are likely to paint a more sobering picture. Meantime, the problems afflicting the housing market will likely be reflected in still weak credit uptake (Monday) and residential building consents (Tuesday). Overall, we look for the NZD/USD to consolidate within a 0.6700-0.6950 range over the coming week. The USD shuffled sideways against the major currencies on Friday night, as investors speculated on what sort of bail-out package the US law-makers would agree on. EUR/USD surged above 1.4850 early last week as the USD was sold heavily amid concerns the US Treasury bailout package would undermine the attractiveness of US denominated assets given the likely rapid expansion of US national debt. However, EUR/USD edged back down towards 1.4550 as the week progressed and it became clear the problems were not isolated to the US (Belgian-Dutch financial group Fortis is suffering a crisis of confidence and UK mortgage lender Bradford and Bingley is on the brink of being nationalised). Funding pressures around the global also escalated last week. Financial institutions have become very reluctant to lend to each other for fear their counterparty would become the next bankruptcy victim. In order to help relieve the cash market tensions, central banks around the world pumped in extra liquidity into overnight cash markets. The US Fed also extended lines of credit with a 1-week maturity to other central banks (including the ECB, SNB, BoE, BoC, RBA, Norges Bank, Riksbank and BoJ) to help ease funding pressures over quarter-end. Over the weekend, the Wall St Journal reported that US lawmakers reconvened talks and hope to agree on a bailout deal before Asian markets open today. Reports suggest the package may include a "financial stability" fund styled as a deposit insurance programme. If a plan is announced, the knee-jerk reaction will likely produce a relief rally across global equity markets underpinning both JPY crosses and the USD. However, the devil will be in the detail and the key to longer term implications will be to watch how credit markets react to the plan. After all, the global credit crisis is not only affecting investor confidence, but the higher cost of credit and lending is acting as a brake on global growth. For the US Treasury bailout plan to be successful it needs to bolster investor confidence and materially improve the availability and cost of credit. While economic data has tended to take a back seat to the financial crisis, there is plenty of US data due out this week (including the manufacturing and services ISM and non-farm payrolls). Across the Atlantic, there is heaps of data scheduled for release, but the main event will be the ECB meeting on Thursday. The ECB is widely expected to keep rates on hold (despite Ireland being in recession and other countries likely to follow suit in Q3), but Trichet's post-decision comments will be closely watched for signs the ECB may be softening its stance. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.