Opinion: NZ$ hits 2 month high as US$ weakens on 'low for longer' Fed rate outlook

By Mike Jones The NZD has spent the last 24 hours drifting higher. The NZD/USD is currently sitting at a 2-month high around 0.7430, having started the week closer to 0.7350. Overnight, currency movements were relatively subdued, as markets await important data releases later this week. St. Louis Fed President Bullard reinforced the idea the Fed will maintain its low interest rate policy for some time to come, saying the Fed will be on hold for "quite some long while into the future". The associated drop in US interest rates saw the USD continue to dribble lower, and this provided a boost to most of the major currencies overnight. "˜Growth-sensitive' currencies like the NZD were also supported by further gains in risk appetite. ECB President Trichet reiterated the global economy is "in a recovery mode". Meanwhile, yesterday's upbeat Chinese trade data provided further evidence the Asian region is leading the global economic recovery. Chinese exports surged 17.7% y/y in December, compared to expectations of just 5%. Our index of risk appetite (which has a scale of 0-100%) rose to 68.8%, from an already lofty 67.7%. Along with the recent widening in NZ-US 3-year swap spreads (to 325bps), this has pushed the "˜fair-value' range implied by our short-term valuation model up to 0.7350-0.7550. This suggests that dips in NZD/USD below 0.7350 are unlikely to be sustained in the short-term. We suspect today's Quarterly Survey of Business Opinion (10:00am) will build on the rebound it posted three months ago, as has certainly been the trend in its monthly NBNZ business survey counterpart. As such, the QSBO should broadly support the clear pick-up in GDP growth we and the RBNZ are forecasting for 2010. If risk appetite remains buoyant and optimism about the 2010 global outlook continues, we'd expect a push higher in NZD/USD towards 0.7450-0.7500 in coming sessions. For today, initial support is eyed around 0.7360. A daily close above 0.7420 is needed to confirm the current uptrend. The USD weakened against most of the major currencies overnight as markets continued to push back the timing of expected Federal Reserve policy tightening. Hot on the heels of Friday's disappointing US payrolls report, a speech from St. Louis Fed President Bullard last night reinforced the notion that the Fed looks set to keep rates at lows levels for some time. Bullard said the Fed's easy monetary policy is firmly on hold and ""¦shall be on hold for quite some long while into the future." US interest rates fell in the wake of the speech (2-year US Treasury yields were down around 4bps) and this tended to weigh on the USD. Further gains in investors' risk appetite overnight added to selling pressure on the USD. Yesterday's Chinese trade data showed both imports and exports racing ahead of expectations (December export growth was clocked at 17.7%y/y vs. 5.0% expected) spurring optimism about the speed of the global recovery. In addition, ECB President Trichet acknowledged the improvement in the global economy, noting that "at a global level we are in a recovery mode." While both equities markets and commodity prices ended the night broadly flat (the S&P500 is currently down 0.1%), the VIX index (a measure of risk aversion) fell from 18.5% to 17% "“ a 20 month low. Higher risk appetite encouraged demand for "˜growth-sensitive' currencies like EUR, AUD and NZD, at the expense of the USD. The weaker USD saw EUR/USD edge up to around 1.4550, from just over 1.4400, while GBP/USD headed up to nearly 1.6200 from around 1.6100. Gains in the EUR may have been assisted by a statement from the Chairman of the Swiss National Bank that "the SNB will continue to prevent any excessive appreciation of the Swiss franc against the euro." In reaction, EUR/CHF spiked briefly above 1.4790, before these gains were largely unwound over the rest of the night. Looking ahead, there is plenty of event risk to watch out for this week. The US Q4 corporate earnings season kicks off after the NY close this morning (Alcoa is due to report), which could be important in shaping equity market sentiment. Later in the week, European industrial production, the Fed's Beige Book, the ECB policy announcement, US retail sales and industrial production, and Australian employment data are all due for release. If the tone of global data continues to portend an improving growth picture for 2010, we'd expect growth-sensitive currencies to again outperform this week. What's more, with USD speculative positioning now broadly balanced (the large net USD short position of late last year is no longer), we may see further gradual weakness in the USD. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.