Opinion: NZ$ had fresh 9-month low versus AU$ as the lucky country sprints ahead of us

By Mike Jones The NZD suffered at the hands of a sharp reduction in global risk appetite overnight. NZD/USD slumped nearly a cent to around 0.6920. The NZD started the night on the front foot. A speech from RBA Deputy Governor Battelino painted a positively rosy picture of the Australian economy and the mining boom currently underway across the Tasman. Battelino even noted "fundamentals" should see the AUD continue to rise. Markets took his view to heart. The AUD/USD jumped from 0.9000 to 0.9060, and NZD/USD headed up to nearly 0.7060 on the AUD's coat tails. Nevertheless, the AUD outperformed. Battelino's comments again highlighted the stark differences in the state of the antipodean economies. Indeed, NZ-AU 3-year swap spreads fell to -69bps yesterday, the lowest since October last year. As a result, NZD/AUD slipped to a fresh 9-month low of nearly 0.7760, and this weighed on the NZD. Overnight, investor concerns about the fragile state of the global economy were re-awakened following a swathe of disappointing data. Not only did US consumer confidence and house prices undershoot expectations, but the German IFO business survey was indicative of a flat lining in German growth. Ratings agency Fitch also downgraded Greece's four largest banks. As a result, investors' risk appetite slumped and global equity indices fell between 0.7-1.5%. Our index of risk appetite (which has a scale of 0-100%) fell 3 percentage points to 57.3%. Against this backdrop, investors shunned growth-sensitive currencies like the NZD and rushed back into "˜safe-haven' currencies like JPY and USD. For today, there is nothing on the local data calendar. As such, offshore equity market sentiment will be key in providing direction for the NZD. All up, we suspect the environment of heightened risk aversion and general nervousness about the global recovery will limit bounces in NZD/USD to 0.7020 in the short-term. Initial support is eyed towards 0.6820. The USD and JPY were the strongest performing currencies overnight, as a spike in risk aversion saw investors flock back into "˜safe-haven' assets. Still, it was a night of two halves for the USD. Early in the night, strong gains in AUD paved the way for a strop higher in most of the major currencies. RBA Deputy Governor Battelino outlined the RBA's upbeat outlook for the Australian mining sector, and the benefits it will confer on the wider Australian economy. In the wake of the Battelino's speech, AUD/USD jumped from around 0.9000 to above 0.9060 and EUR, NZD, and GBP all headed up in the AUD's slipstream. However, lows in the USD didn't last for long. Heightened fears about the global recovery and some more "˜bad' news on Greece saw risk appetite and stock markets get pummelled. As a result, investors trimmed positions in "˜riskier' currencies, and increased exposures to "˜safe-haven' currencies like the USD and JPY. European equities retreated between 0.7-1.5% and the S&P500 is currently down around 1.2%. The VIX index (a measure of S&P500 volatility used to proxy risk aversion) rose above 21.5% from below 20% at the start of the night. The German IFO survey undershot expectations (falling to 95.2 vs. expectations of 96.1) underscoring fears the German economy is stagnating. Comments from the IFO institute that the German economy may have contracted in the first quarter only served to make matters worse. The weaker data saw earlier EUR gains reverse. From above 1.3650, EUR/USD slid over a cent to below 1.3550. Ratings agency Fitch downgraded Greece's four largest banks to BBB, adding to the EUR's woes. Across the Atlantic, the economic news was not much better. US consumer confidence sagged to a 10-month low of 46.0, in contrast to expectations for a flattish 55.0. Adding to concerns about the pace of the US recovery, US house prices registered a sharper-than-expected decline in Q4 according to the Case-Shiller index (-2.51%q/q vs. -1.2%). Despite 2-5bp falls in US bond yields, the USD extended its gains after the weaker data, indicating risk aversion was the key driver of currencies overnight. Looking ahead, Fed chairman Bernanke's semi-annual testimony will occupy markets' focus tonight. In particular, investors will be looking for further hints on timing of the Fed's planned exit strategy from current monetary stimulus. We suspect Bernanke will reiterate the Fed's pledge to keep rates low for an "extended period". While this may provide some near-term headwinds for the USD, we suspect the USD index will remain supported on dips towards 80.00. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.