Opinion: Desperate measures calm markets...for now
19th Sep 08, 9:09am
By BNZ Currency Strategist Danica Hampton The NZD/USD staged a bit of recovery last night underpinned by a generally weaker USD and the stabilisation in global financial markets. The USD started the offshore session on the back foot pressured by ongoing fears about the fragility of the financial sector and "flight to quality flows" into safe-haven assets like gold and government debt. Against a generally weaker USD and firmer gold prices, EUR/USD surged from around 1.4300 to above 1.4500 and NZD/USD was dragged up to around 0.6790. As the night progressed, a collaborative effort from central banks to inject cash into tension-filled global money markets had a bit of calming effect on financial markets. Meantime, US equities rebounded strongly helped by the FSA's suspension on "short selling" of UK stocks and rumours suggesting the US authorities were thinking about creating a repository for bad bank debt. The recovery in US stock markets and rebound in investor confidence helped underpin NZD/JPY and while the NZD/USD dribbled off its highs there were few reasons to sell NZD more aggressively. Keep an eye out for today's current account deficit (due at 10:45am), but expect the NZD/USD to continue taking its cues from global financial market sentiment. In the near-term, we suspect the countervailing forces of a weaker USD and risk aversion-inspired selling of NZD/JPY will keep NZD/USD range bound. While last night's recovery in US stock markets will likely provide some support for NZD/USD, with NZ teetering on the brink of recession and global investor confidence still fragile, we expect sellers to emerge on bounces towards 0.6790-0.6800. On the downside, solid support is seen around 0.6500 and it will take a break below last week's 0.6440 low to suggest the downtrend is gaining traction. Financial markets stabilised a little as central banks pump liquidity into cash markets and the FSA suspends short-selling of UK stocks. Over the past few days, short-term money market rates around the world have skyrocketed as worries about who the next financial casualty will be has made financial institutions became very reluctant to lend anything to anyone. In order to ensure global money markets continue to function central banks have been injecting huge amounts of cash into the system. Early in the European session, the Fed announced it had increased its USD swap lines with other central banks from US$67b to US$ 247b (increasing lines with the ECB and SNB and establishing new ones with BoJ, BoE and BoC). The announcement had a bit of a calming effect on financial markets last night. US 3-month T-bill yields stabilised around 0.06% (down from 1.017% at the start of the week), US 2-year yields slipped 5bps to 1.60% (down 60bps from a week ago) and the rate to borrow overnight USD through the forward market settled around 3.85% (in normal circumstances it should be around the fed funds rate of 2.00%, but it did spike as high as 12.00% earlier in the week). Global equities also stabilised last night. The FTSE fell just 0.66%, the DAX closed flat and the S&P500 is currently up 4.00%. Equity markets have probably been helped by the suspension of "short selling" by the UK Financial Services Authority. In the US, CALPERS (the largest US public pension fund) has said it will no longer lend out shares of Morgan Stanley and Goldman Sachs in order to prevent excessive short selling. While rumours the US authorities were considering creating an entity like the Resolution Trust Corp (which was formed in 1980s after the failure of savings and loan banks) for the repository of bad bank debt also helped lift sentiment. The USD started the offshore session on the back foot and EUR/USD climbed sharply from below 1.4300 to above 1.4500. GBP/USD was slow to follow the EUR/USD higher as rumours about an emergency Bank of England rate cut circulated. However, with nothing materialising from the Bank of England and UK retail sales data printing on the stronger side of expectations (sales grew 3.3%y/y in August vs. 1.6% forecast) GBP/USD rebounded from around 1.8150 to above 1.8250. However, EUR/USD and GBP/USD were knocked off their highs by lingering concern about the health of the global economy, still prevalent risk aversion and the expectation that repatriation of US assets will help support the USD.