BNZ Daily FX Wrap & Strategy

BNZ Daily FX Wrap & Strategy

NZD
The NZD/USD has spent the past 24 hours consolidating within a 0.5060-0.5200 range.

Through the first half of the night, risk appetite and demand for growth sensitive currencies like NZD was bolstered by hopes the US government would provide further assistance for beleaguered banking giant Citigroup. At the margin, the announcement of NZ$530m worth of Uridashi issuance and hopes that upcoming maturities will be rolled (rather than redeemed) may have also helped NZD sentiment. NZD/USD climbed steadily up towards 0.5200.

However, the buoyancy in NZD/USD didn't last. Investors worried the US Treasury's new bank recapitalisation plan wouldn't be enough to stabilise the banking system and ECB President Trichet warned the Eurozone financial system was under severe strain. Global equity markets swiftly turned south, risk aversion resurfaced and investors trimmed exposures to NZD in favour of the relative safety of the USD.

Globally, currency markets are struggling to find direction. Investors are still worried about the global recession and equity markets are still weak. But the JPY appears to have lost some of its "safe-haven" status (thanks to last week's terrible Japanese GDP and dissipating repatriation flows). Given the troubles in Eastern Europe and Europe's measured approach to monetary and fiscal easing, investors aren't keen on EUR either. As such, it looks like the USD will remain the "safe-haven" currency of choice. While we may see a bit of NZD demand against the crosses, a generally firmer USD should ensure bounces in NZD/USD are limited.

For today, bounces in NZD/USD will likely be limited to 0.5180-0.5200. On the downside, initial support is seen ahead of 0.5060. While the downside will remain the greater risk to the NZD/USD over the coming sessions, we suspect we'll need to see fresh impetus before the currency breaks below solid support around 0.5000.

Majors
The USD firmed against most of the major currencies last night, as investors digested details of the US bank recapitalisation program and global equities sank further.

The US Treasury, Fed and bank regulators announced a new "Capital Assistance Program" last night. Under the new program, banks will be "stress tested" and those found to require more capital will attempt to raise it privately. For those unable to raise private capital, the Treasury will buy mandatory convertible preference shares, which will only be exchanged into common equity as needed to maintain adequate capitalisation.

While the new program stops short of nationalising US banks, investors are worried it won't be enough to stabilise the banking sector. Citigroup shares have rebounded from Friday's US$160 low to around US$2.10, but the S&P500 financial index is down about 1.5%. Soft financial stocks, combined with a heavy sell-off in technology shares (thanks to a drop off in capital spending), weighed on broader equity indices. The S&P500 is currently down 2.4%.

The continued slide in global equity markets put a dampener on risk appetite and 'safe-haven' demand tended to support the USD.

EUR/USD slipped from nearly 1.3000 to just above 1.2700 last night. ECB President Trichet warned the Eurozone financial system is under severe strain. Meantime, ratings agency Fitch said it was "concerned" about Austria's AAA rating because of its exposures to emerging European economies. Further clues on the outlook for Eurozone growth will come from this week's German IFO (Tuesday) and European Commission activity surveys (Thursday).

Currency markets are grappling for direction. Japan's disastrous 3.3% q/q Q4 GDP decline compares miserably with other industrialised nations and this has seen JPY lose a bit of its lustre as a "safe-haven" currency. Investors aren't keen on EUR either because of the risks associated with Eastern Europe, the ECB's measured approach to cutting rates and the lack of a single EU-Treasury means that it is very difficult to adopt more radical policy measures (like those pursued by Japan and the US).

On balance, it looks like the USD will emerge looking like the best of a bad bunch. We expect EUR/USD will struggle above 1.3000 and suspect we'll see a move back towards 1.2500 over the coming weeks.

See the full report as a pdf here.

ENDS

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