Woah! Yesterday's 1.1% Q1 GDP growth blew all forecasts out of the water and certainly the market consensus of 0.4/0.5% (BNZ 0.6%).

Moreover, the positive surprise was reinforced by revisions that added up to annual growth of 2.4% (market expectations 1.3%).

In the wake of the stronger numbers, the NZD/USD surged to 1� month highs above 0.8000 as markets priced out any chance of RBNZ rate cuts this year.

Local swap rates ended the day 7-9bps higher across the curve, further bolstering the yield differential of the NZD. NZ-US 3-year swap differentials now sit at 230bps, a full 40bps higher than where they started the month.

To be sure, yesterday's bumper GDP figure overstates the pace of underlying growth somewhat.

But the figures at least confirm the beginnings of the growth pickup we've been expecting for a while. Forward indicators for Q2 remain encouraging.

As long as European risks remain contained, ongoing NZ economic improvement should continue to underpin local swap yields and keep the RBNZ on track to begin hiking interest rates from Q1 next year.

The offshore picture is a little different. Additional policy easing from all of the Federal Reserve, Bank of England, and ECB now looks likely. Alongside steady local interest rates, the spectre of more easing from the 'G3' would act to further enhance the yield appeal of the NZD. We still think the NZD is on a positive medium-term trend and dips below 0.7500 are unlikely to be sustained.

However, for now, the immediate risks are to the downside. Overnight, the NZD/USD lost some of its lustre. Offshore markets went back into risk aversion mode as a slew of weaker data and banking sector concerns weighed on sentiment. Equities and commodity prices are a sea of red. 'Safe-haven' currencies like the USD and JPY are back in vogue. Against this backdrop, the NZD/USD is opening this morning around a cent lower than levels yesterday morning around 0.7860.

Locally we wrap the week with the monthly net immigration number for May which is likely to be another negative (part of what's constraining the economy's supply potential). Monthly credit card billings figures are also due this afternoon.

Still, dour global risk sentiment should ensure the NZD trades with a negative bias through the day. This is particularly so given ratings agency Moody's should hit the wires shortly with a bunch of US, European, and UK bank downgrades. Near-term support on the NZD/USD is eyed around 0.7810. If not today, we should test this level sometime in the next few sessions.

Majors

Fear and loathing returned to financial markets overnight. Disappointing economic data and banking sector worries generated widespread risk aversion.

With the Fed dashing immediate hopes of additional policy stimulus yesterday, markets are a little more sensitive to signs of slowing global growth. And there was evidence of this in spades overnight.

Yesterday's HSBC flash PMI showed the Chinese manufacturing sector remains in contractionary territory (48.1 vs. 48.4 last month). And the flash estimates of Eurozone manufacturing PMIs suggested there has been little recovery from the April slump. Particularly worrying for investors were more signs weakness in the European periphery is spreading to Germany (where the headline manufacturing index fell from 45.2 to 44.7). Tonight's German IFO will be important.

The data across the Atlantic wasn't much better. US jobless claims, home sales and the new US flash PMI index all underwhelmed.

Worries about deteriorating global growth took a heavy toll on equity markets and risk sentiment.

Banking sector worries simply added to the malaise. Newswire reports suggested Moody's is on the cusp on downgrading 17 of the world's major banks, and chatter about Spanish banks needing more capital continued.

Global equity indices are down 0.4-2.1%, commodity prices are lower (oil is off over 4%), and the VIX index (a proxy for risk aversion) has leapt from 17% to almost 20%. Currency markets reflected a traditional 'risk-off' scenario. The 'risk-sensitive' AUD, NZD, and EUR were shunned in favour of the 'safe-haven' USD and JPY. Most of the majors notched up losses around 1% against the firming USD.

For today, rising risk aversion and equity market weakness should keep the EUR and risk currencies heavy. EUR/USD bounces towards 1.2600 should attract sellers with the AUD/USD expected to encounter headwinds above 1.0060. Watch out for a possible Moody's downgrade announcement sometime during our time-zone.