Opinion: NZ$ wafts around 74.5 USc after Fed's Bullard suggests 'low rates til 2012'

By Mike Jones The NZD/USD has spent the last 24 hours in a reasonably tight 0.7430-0.7500 range. Currency markets struggled a little bit for direction overnight. Early in the night, the NZD continued to march higher on the back of firming commodity prices. Gold prices reached yet another record high, this time above US$1150/ounce, which helped spur more broad based commodity price gains (the CRB index was up over 1% at one point). As a result, "˜growth-sensitive' currencies enjoyed good support and NZD/USD rose to within a whisker of 0.7500. St. Louis Fed President Bullard implied the Fed may not hike rates until 2012, which weighed on the USD, and provided further support to the NZD/USD. Solid demand for NZD/GBP was also noted overnight following the more dovish-than-expected November Bank of England (BoE) minutes. The BoE's discussion of a cut to the remuneration rate on bank reserves saw markets scramble to push the GBP lower, sending NZD/GBP above 0.4450. However, later in the night everything went a little soggy. Renewed fears about the global outlook following weak US housing market data (both housing starts and building permits came in below expectations) shot equity markets into the red and saw commodity prices pare their gains. With risk appetite under pressure, the NZD/USD unwound earlier gains to end up pretty much where it started the night around 0.7450. The NZD/USD has been trapped in a 0.7400-0.7500 range for most of this week. However, we suspect further modest gains in the NZD are likely looking ahead. A sustained rally in the USD looks some way off and local fundamentals are still supportive. At around 340bps, NZ-US 3-year swap spreads are up around 13-month highs. Our short-term valuation model suggests a "˜fair value' range in the NZD/USD of 0.7400-0.7600. All up, these factors suggest that dips below 0.7350 in NZD/USD are unlikely to be sustained. For today, support on NZD/USD is seen on dips towards 0.7410, with initial resistance at 0.7500. Developments in currency markets overnight were a little mixed. Most major currencies continued to trade choppily in familiar ranges. The Bank of England's (BoE) minutes from its November MPC meeting showed a three way split on the decision to extend quantitative easing by £25b. Seven MPC members voted for the £25b increase, one preferred an £40b rise, and one voted for no change. The Bank also discussed cutting the remuneration rate on commercial bank reserves, which came as a surprise to markets. All up, the minutes were seen as a bit more dovish than expected, and GBP/USD slipped from above 1.6800 to close to 1.6750 as a result. The USD spent most of the night dribbling lower as traders contemplated recent Fed rhetoric indicating policy is likely to remain accommodative for some time. These sentiments were reinforced by a surprisingly dovish speech from St. Louis Fed President Bullard (who becomes a voting member of the FOMC in 2010). Bullard essentially said that markets could forget about the Fed's interest rate policy and should instead remain focused on changes to its quantitative easing (QE) program. He even went as far as to suggest 2012 should be viewed as a "baseline" for the start of Fed tightening. Not surprisingly, the comments further undermined the USD, sending EUR/USD to nearly 1.4980. However, modest falls across US equity markets and some tepid US data limited the gains in the major currencies as risk appetite was tempered. The US CPI was not quite as weak as expected, but nevertheless remained in negative territory (-0.2%y/y vs. -0.3% expected). Meanwhile, both US housing starts and building permits registered sharp declines in October, in contrast to market expectations. In fact, housing starts fell 10.6%m/m to the lowest level since April. Fears about the global outlook and lacklustre stock markets saw "˜growth sensitive' currencies like AUD, CAD and NZD finish the night a little softer. Looking ahead, with risk appetite still on a generally improving trend and Fed rhetoric suggestive of accommodative policy remaining in place for some time, we suspect the USD will remain heavy. However, substantial further weakening remains unlikely in our view. Of note, the USD index has rebounded off support around 74.80-74.90 the last three times it has reached this level and we expect this support level to hold near-term. On the topside, headwinds are expected towards 75.50. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.