Opinion: Kiwi$ falls as US$ rises on higher US interest rates

By Danica Hampton The NZD/USD eased lower last night, weighed down by a generally firmer USD. There wasn't a lot in the way of fresh information driving markets last night. Global equities posted strong gains and a sharp sell-off in US interest rates (US 10-year government bond yields rose 10bps to 3.65%) helped bolster the USD. Comments from the European Commission warning about the overvalued EUR may have also helped the USD. Against a generally stronger USD, NZD/USD sank from above 0.7100 to around 0.7050. A media story suggesting the RBA may have jumped the gun with its back-to-back rate hikes gained some attention last night, but mostly investors are counting down to Wednesday's NZ GDP release (and of course Christmas). Today's Q3 Balance of Payments might offer some eleventh-hour clues on GDP but will more generally register another slimming in the current account deficit "“ to about 3.8% of GDP for the year to September ("helped" by further tax-case hits to domestic banks and thus lower accrued profits to foreign parent owners). While NZD/USD has slipped lower over the past fortnight, it's worth pointing out that the fundamental backdrop remains relatively supportive. The global recovery is continuing to support both commodity prices and risk appetite. The global price of NZ's export bundle (as measured by ANZ's commodity price index) has risen nearly 40% from February's lows "“ helped by a whopping 75% increase in dairy prices. Meantime, our risk appetite index is currently sitting at 55%, just above its long-term average of 50%.This positive NZ sentiment will likely be reaffirmed by Wednesday's Q3 GDP report, which should confirm the NZ economic expansion is underway, albeit slowly (we're looking for 0.3%q/q). For today, the backdrop of a generally firmer USD should ensure NZD/USD bounces are limited to 0.7100. Initial support is seen around 0.7045-0.7050, but a break below this level will open up the downside towards 0.7000-0.7015. For more information on how the NZD will fare in 2010, keep an eye out for our NZD 2010 Roadmap published yesterday. The USD nudged higher against most of the major currencies last night, but there wasn't much in the way of fresh information to drive markets. GBP/USD slipped from above 1.6160 to around 1.6060, while EUR/USD spent most of the night trading choppily within a 1.4280-1.4380 range. In its quarterly report, the European Commission warned that the EUR was over-valued relative to its REER (CPI-deflated real effective exchange rate) and that "further euro appreciation could be a serious concern for the more open euro-area economies". PBOC officials also commented on currencies. PBOC monetary policy committee member, Fan, said "In the long term, the US dollar will definitely depreciate, although in the short-term there will be fluctuations". However, market participants shrugged off the comments and instead the USD was bolstered by the sharp sell-off in US interest rates. The US 10-year government bond yield rose to its highest level in five months last night. Strong gains in US stock markets, and lingering worries about the anticipated surge in supply next year, saw US interest rates push higher and the yield curve steepen. US 2-year government bond yields rose 5bps to 0.85% and US 10-year yields rose 10bps to 3.65%. Global equity markets posted solid gains last night, boosted by a wave of corporate activity. French drug maker Sanofi-Aventis is buying Chattem, mining equipment maker Bucyrus International is buying a division of the Terex Corporation and Korea National Oil Corp has agreed to buy Canada's Harvest Energy Trust for C$4.1b. European indices rose almost 2% and US indices are up a little of 1%. On a trade weighted basis, the USD has risen more than 4% since the start of December. Much of this strength simply reflects market positioning as a string of upbeat US data has unnerved those holding short USD positions. With speculative market positioning now looking a bit more balanced, further gains the USD will likely be hard fought (requiring either upbeat US data or a worsening risk appetite). However, holiday-thinned trading conditions may mean that trading remains choppy. Tonight the final estimate of US Q3 GDP (which is expected to remain unchanged at an annualised pace of 2.8%) is released. In the UK, Q3 UK GDP is expected to be revised up (from -0.3%q/q to -0.1%q/q). * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.