Opinion: NZ$ near 75 USc as market focuses on Bernanke

By Mike Jones The NZD has started the week on the front foot. Firming risk appetite and strong gains in commodity prices has seen NZD/USD consolidate above 0.7400 over the past 24 hours. Overnight, more encouraging US data provided a backstop for investors' risk appetite. US retail sales surged 1.4% in October, well above the 0.9% markets had anticipated. This tended to overshadow the weaker-than-expected Empire Manufacturing survey (23.5 vs. 30 expected), helping US stocks post gains of around 1.6%. As a result, risk appetite continued to improve, undermining the "˜safe-haven' appeal of the USD. The weaker USD, and optimism about the outlook for global demand, also provided strong support to commodity prices overnight. Gold prices reached a new high of almost US$1140/ounce and oil prices soared 3% to around US$79/barrel. The CRB index (a broad measure of commodity prices) was up around 3%. The backdrop of firming commodity prices and USD weakness encouraged demand for "˜growth-sensitive' currencies like the NZD. Strong appetite for NZD/USD from both speculative and model accounts saw the NZD/USD eventually reach a three week high of nearly 0.7480. A speech from Fed Chairman Bernanke late in the offshore session then sparked some vicious volatility in currency markets. Markets initially reacted to headlines that Fed policy will "help ensure that the dollar is strong and a source of financial stability". The knee-jerk reaction to buy USD saw EUR/USD spike almost 1c lower and NZD/USD dip below 0.7440. However, as markets came around to the idea that nothing has really changed in terms of Fed policy, these moves were all pretty much reversed and NZD/USD continued on its upward trajectory. We suspect positive sentiment in equity markets and optimism about the global recovery will keep the NZD/USD well supported today. Initial support is seen on dips towards 0.7410. Keep an eye out for the RBA November Board minutes due out at 1:30pm (NZT). Similar themes prevailed in FX markets overnight. The USD weakened against all of the major currencies. A speech from Fed Chairman Bernanke caused significant volatility, but offered no lasting support to the USD. Early in the night, US stocks got the week off to a flying start following encouraging US retail sales data. Sales for October rose 1.4%, noticeably stronger than the 0.9% analysts had forecast. This data provided a bit of an offset to the weaker-than-expected Empire Manufacturing survey (23.5 vs. 30 expected), helping the S&P500 post gains of around 1.8%. European stocks also rose strongly; the DAX was up just over 2%. The buoyant mood in global equity markets saw the USD remain under pressure as firming risk appetite encouraged investors to trim "˜safe-haven' positions. Indeed, the USD Index flirted with 15-month lows around 74.90 at one stage during the night, sending EUR/USD above 1.4980 and GBP to nearly 1.6800 (GBP also found support on the back of a "long GBP" recommendation from HSBC). However, a speech from Fed Chairman early this morning then effectively blindsided currency markets. Bernanke reiterated sentiments from recent Fed statements, acknowledging the US economy is slowly recovering, but again cautioning interest rates will remain at exceptionally low levels for "an extended period". But markets were more interested in a rare commentary on the USD. In particular, Bernanke said that effective Fed policy, along with the underlying strength of the US economy, will "help ensure that the dollar is strong and a source of financial stability". The knee-jerk reaction following the speech was to buy the USD as traders scrambled to cover short positions. As a result, EUR/USD initially plummeted nearly a cent to below 1.4900. However, all the USD gains were subsequently unwound as traders realised that nothing has really changed. Bernanke really just said the Fed will continue to run monetary policy towards achieving both price stability and maximum employment, and if it is successful, a stronger USD will ultimately be the result. The speech was certainly not a call to arms for immediate action against the USD weakness. Looking ahead, with risk appetite still on a generally improving trend and the Fed likely to remain on hold for "an extended period", we suspect the USD will remain heavy in the short term. However, substantial further weakening remains unlikely in our view. Indeed, the USD index has previously found solid support around 74.70 "“ close to where the index is now. Initial resistance is seen 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.