Opinion: Global recovery hopes and steady RBA rate boosts Kiwi$

By Mike Jones The NZD was the strongest performing currency overnight. From lows around 0.7050 after the RBA decision, a steady recovery in risk appetite saw NZD/USD finish the night closer to 0.7120. The RBA's decision yesterday to keep rates unchanged at 3.75% was a real fly in the ointment for the AUD. Just about every economist in Australia had expected a 25bps hike. In contrast, the RBA felt that a pause was warranted given recent increases in loan rates, uncertainty about China's attempts to slow their economy and the global picture more generally. While further rate hikes appear to be in the offing, the immediate reaction to the statement saw the AUD/USD fall more than a cent to around 0.8780. NZD/USD was dragged lower in the wake of the weaker AUD/USD, to around 0.7050. However, lows around 0.7050 didn't last long in NZD/USD. With the pace of future RBA tightening now a little more uncertain, the NZD benefited from strong interest to buy NZD/AUD overnight from various speculative and leveraged type accounts. Indeed, NZD/AUD flirted with monthly highs close to 0.8050. The NZD also found support from a broadly weaker USD and further recovery in risk appetite overnight. Fears over the Greek fiscal crisis have eased somewhat (the EU is due to release its recommendations for Greece tonight) and both commodity prices and equities markets built on yesterday's gains (the CRB index is up around 1.9%, while the S&P500 is currently up about 1.1%). The NZD managed to shrug off a weaker result from Fonterra's online milk price auction. The weighted average price of whole milk powder (WMP) fell 1.6% to US$3,256 (albeit prices are still up around 75% from the lows seen in July 2009). This is the second consecutive monthly fall following the 7.1% fall in January and is consistent with a more general theme of peaking dairy prices. Looking ahead, there is nothing on the local data calendar until the all-important Q4 employment data on Thursday. As such, expect near-term NZD/USD direction to come from offshore. Near-term resistance is expected towards 0.7170. Most of the major currencies have strengthened against the USD over the past 24 hours. The obvious exception is the AUD. The RBA shocked markets yesterday by keeping its cash rate on hold at 3.75%. Surveys showed all 20 polled economists had expected a 25bps hike, while markets had priced a 70% odd chance of such. Justifying the unchanged decision, the RBA noted increased concerns over sovereign solvency, and the recent actions by China to reduce stimulus. While the RBA left no doubt that further rate rises are in the pipeline, the knee-jerk reaction in the wake of the decision saw AUD/USD tumble over 1 cent from 0.8920 to nearly 0.8780. The weaker AUD, and the RBA's less upbeat take on the global economy, provided an initial boost to the USD. As a result, most of the major currencies started out the night under pressure. However, easing fears about Greece and a positive night across global equity markets later helped lift investors' risk appetite, reducing "˜safe-haven' demand for the USD. EUR led the gains in the majors currencies on speculation tonight's release of the EU's recommendations for Greece's austerity plan will help the struggling nation pull through its fiscal difficulties. Greek bond spreads over have now fallen back to around 350bps over German Bunds, from highs around 405bps last week. EUR/USD pushed up to nearly 1.3970, from post-RBA lows around 1.3890. However, lingering fears over sovereign solvency continue to limit gains in the EUR. Portuguese central bank head Constancio said Portugal's economy still required "significant adjustments". With the firmer EUR keeping the USD on the back foot, most of the major currencies edged higher against the USD. Commodity currencies like CAD, AUD and NZD received an additional boost from broad-based gains in commodity prices. The CRB index (a broad measure of oil prices) is up over 1.5%, led by a 3% increase in oil prices. USD/CAD finished the night slightly softer around 1.0590, while AUD/USD managed to bounce off its RBA lows to nearly 0.8860. Global equity indices posted gains of between 0.7-1.2%, further encouraging investors' risk appetite. In contrast, GBP/USD struggled towards 1.6000 despite the weaker USD. While most investors expect the BoE to signal a pause in its quantitative easing program on Thursday, investors are nervous about pushing GBP too high ahead of the BoE's policy announcement. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.