The Opening Bell: Where currencies start on Monday, October 17, 2011

By Dan Bell

NZDUSD surged to a 4-week high Friday night on optimism that European leaders would take bold steps to tackle the EU debt crisis. This triggered further short-covering and 'risk-on' trades.

The Group of 20 finance ministers and central bank chiefs began a 2-day meeting in Paris on Friday, after the EU 17 member nations completed their approval of the plan to strengthen the rescue fund for the region's ailing nations and their banks. This has  boosted market sentiment further and sparked a strong rally in EURUSD, commodity currencies such as the NZD, equity markets, and metals prices (including gold and copper).

Also supporting the positive market sentiment was news that China's inflation dipped (easing worries of further tightening and hence a slow down in China and in global commodity prices), strong US retail sales and corporate earnings, along  with talk the European Central Bank was buying Italian and Spanish debt.

Short term momentum suggests further gains are possible, however stop losses and short covering has played a significant part in the recent rally, so be wary. Significant risk and obstacles lie ahead; there remains talk of Greek bond holders taking a 50% writedown, more potential sovereign and bank credit downgrades, negative credit contagion, policy implementations issues and delays, amongst others.  Proceed with caution and ensure you monitor and protect your downside.

Current indicative levels are: 0.8020 USD, 0.7770 AUD, 0.5780 EUR, 0.5070 GBP, and 61.80 JPY.

And finally and importantly, the All Blacks comprehensively outplayed Australia 20-6 to make the Rugby World Cup final for the first time since 1995. Bring on the French for next weekend!

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Dan Bell is the senior currency strategist at HiFX in Auckland. You can contact him here