News and views
Overnight price action was a virtual rerun of the previous two days, with riskier currencies holding their ground against the USD until the minute that US equity markets opened. Equities fell heavily after US Treasury Secretary Paulson said that buying toxic mortgage securities was no longer the best use of the $US700bn bail-out fund; without a clear sense of how the funds will be used, investors retreated once more from risky assets. The broad USD index gained around 0.5% for the day, and is closing in again on the two-year highs reached in October.
NZD held within a 0.57-0.58 range until the US equity market open, then promptly dropped as low as 0.5560 before recovering back to 0.5610 this morning. Trade in the NZD remains very thin and gappy and is unlikely to improve as the Christmas period approaches.
AUD slid from 0.6600 to a two-week low of 0.6350 during the New York session. The NZD/AUD cross was largely range-bound but ended the day on its highs around 0.8770.
EUR fell early in the overnight session on talk of central banks selling euro to rebalance their reserves portfolios, having earlier sold USD to prop up their currencies. EUR was relatively stable during the NY session though, and even eked out some small gains.
GBP was hit hard after the Bank of England’s inflation report noted that inflation would severely undershoot the target in the absence of rate cuts. The currency was trashed further on the weak US equities, falling below 1.50 to reach a new eight-year low.
No US data to report. However a speech by outgoing Treasury Secretary Paulson generated plenty of interest. He plans to divert part of the $700bn TARP (financial rescue plan) away from troubled mortgage assets, instead using it to help boost the availability of consumer credit. He remains unwilling to use it as aid for the ailing automakers, which could lead to problems getting the second tranche of the bailout package approved by Congress, given that House speaker Pelosi wants immediate action in that area.
Euroland industrial production down 1.6% in Sep. We already knew that German IP had fallen nearly 4% so this was no surprise. Output was down 2.4% yr, its steepest annual pace of decline since 2002.
Bank of England signals further rate cuts. The BoE’s quarterly inflation report saw the central projection for the CPI revised down by the most ever in the 11 years that the Bank has had policy independence. Also, the central projection on a constant rate assumption in two years time was just 1%, a full 1% below the 2% target, the biggest forecast target “miss” in that time. Governor King stressed that uncertainties were especially acute this time around and they included unknowns like the extent of imminent fiscal stimulus. Nevertheless markets interpreted the report and comments as a strong signal that rates will be cut sharply further in December. In response to a question about whether the bank rate could be cut to 0%, he said that “ we are prepared to cut it to whatever level is necessary”. The Bank now expects the UK economy to be in recession until well into 2009. In related news, UK unemployment rose a further 37k in October.
Outlook
We are neutral on NZD in the short term. News from the corporate world is dominating investor sentiment at the moment, but we feel this should be at the least balanced out by the extent of fiscal stimulus and other government support that is being unleashed in the wake of the G20 meeting. Looking ahead, NZD will still need to remain below its long-term average for an extended period to soften the blow of a weaker world economy.
