Opinion: NZ$ back above 74 USc on fall in Aussie unemployment, rate hike talk

By Mike Jones The NZD/USD has spent the last 24 hours consolidating in a 0.7390-0.7440 range. While currency markets generally lack direction at present, the NZD received a bit of a leg-up from the AUD yesterday following yet another sign the Australian economy is going from strength to strength. Yesterday's Australian employment numbers for December surged 35,200, well above the 10,000 gain expected. The strong result saw Aussie markets move to price in a roughly 80% chance the RBA hikes 25bps in February, sending the AUD/USD hurtling back towards 0.9300 and the NZD/USD towards 0.7420. Overnight, the NZD found support from a generally weaker USD. US December retail sales disappointed the market (-0.3%m/m vs. 0.5% expected) and the Fed's Dudley again stressed US interest rates are likely to remain low for some time to come. These factors prompted a fall in US interest rates which tended to drag on the USD overnight, helping NZD/USD up to an overnight high close to 0.7440. An article from noted RBA watcher Terry McCrann suggesting the RBA could hike rates 50bp early in 2010 was also noted as supportive of AUD and NZD last night. Nevertheless, a downbeat assessment of the Eurozone economy from ECB president Trichet weighed on EUR and served to keep a lid on further USD weakness. As a result, the NZD/USD ran into headwinds above 0.7440 and spent the rest of the night chopping between 0.7410 and 0.7440. It's worth noting, recent falls in US interest rates have increased the yield advantage of the NZD. NZ-US 3-year swap spreads have widened out to around 325 bps, from closer to 310bps at the start of the year. This has pushed up the NZD/USD "˜fair-value' range implied by our short-term valuation model to 0.7400-0.7600. However, in the short-term, key NZD direction will come offshore with just NZ electronic card transactions on the calendar for today. Should tonight's batch of US data and earnings reports fail to match market expectations, the associated fall in US rates could see NZD/USD test resistance around the 0.7440-0.7450 region. Currency markets lacked a bit of direction last night. On balance, most of the major currencies gained against the USD. US retail sales fell 0.3% in December, against expectations of a 0.5% gain (although some of the negative surprise was offset by a upwards revision to November sales). Jobless claims were also a touch higher than expected, increasing to 444,000 in the week to January 10. The softer data reinforced the idea the US recovery is still in a "˜low and slow' phase, and the Fed won't be winding back stimulus any time soon. New York Fed President Dudley also said yesterday that US rates may remain low for at least six months and possibly longer. Against this backdrop, US interest rates fell across the curve, reducing support for the USD. Two-year US Treasury yields fell around 5bps and the rate on the December 2010 Fed funds futures contract was also down 5bps. In the wake of the weaker data, USD/JPY tumbled to around 91.00, from levels close to 92.00. New Japanese Finance Minister Kan further backed away from his previous call for a weaker Yen, adding to selling pressure on USD/JPY. Kan said "Currencies should basically be set by the markets"¦unless a rapid move occurs". Despite the generally weaker USD, EUR underperformed overnight. The ECB's decision to leave rates on hold at 1% proceeded as expected. But ECB President's Trichet struck a more cautious tone at the press conference, stressing the economic outlook in the euro zone remains uncertain and that recovery will likely be uneven. Trichet also pointed out that Greece will not get any "special treatment" as a result of its fiscal difficulties. The ECB is clearly in no hurry to raise interest rates just yet; we expect the ECB can hold off until the fourth quarter of this year. German Chancellor Merkel was also on the wires last night commenting that "Greece's budget deficit risks hurting the euro". As a result, EUR/USD soon dipped back below 1.4500, from close to 1.4540 at the start of the night. The near-term fortunes of the USD will be dependent on tonight's US industrial production and University of Michigan consumer confidence data. The US corporate earnings season also begins to crank up with both Intel and JP Morgan due to report fourth quarter earnings. Positive surprises on either earnings or economic data may see EUR/USD test support around 1.4410. Near-term resistance is eyed around 1.4560. A break through this level would open up 1.4690 as the next target. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.