Opinion: Kiwi$ up overnight but risk appetite fragile

By Danica Hampton The NZD/USD has spent the night consolidating in a 0.6680-0.6760 range. Fears about the outlook for global growth eased a little last night. Germany's ZEW business survey showed a stellar recovery in economic sentiment (it rose to 56.1 in August, well up from the 45.0 forecast). While the US housing data was fairly lacklustre (housing starts fell 1% in July and building permits fell 1.75%), better than expected earnings from major retail chains, Home Depot and Target, helped ease some fears about the outlook for US consumption. The IMF chief economist said the "global recession has left deep scars" but the global economic recovery has started. The absence of more bad economic news helped global equity markets stabilise. The Shanghai index rose 1.4% last night (although it is still down 4.4% since the start of the week), European equities rose about 0.9% and the S&P500 is currently up about 1%. Against a backdrop of firmer global equities, NZD/USD pushed higher as improving risk appetite saw investors pare back "safe-haven" positions in the USD and JPY. Various market commentaries suggest Asian central banks have been widespread sellers of USD and these flows are tending to benefit both the AUD and NZD. Despite the AUD receiving some support from news of a A$50b deal to supply natural gas to China, NZD/AUD broke through stop-loss levels around 0.8150 and pushed to a four month high of just under 0.8200. In the near-term, the global backdrop will be the key to the fortunes of the NZD/USD. While we've seen a bit of stabilisation over the past 24 hours, we'd caution that risk appetite remains fragile and this leaves NZD/USD vulnerable. For today, we suspect NZD/USD will struggle to break above 0.6780-0.6800. Solid support is eyed around 0.6645, but a break below this level will open up the downside towards 0.6590. The US dollar has weakened against most major currencies over the past 24 hours as fears about the global outlook eased. The main focus overnight was on the German ZEW gauge of economic sentiment. Encouragingly, the survey showed sentiment soared to 56.1 in August, the highest in around three years and notably higher than the 45 analysts had expected. UK CPI data was also not as weak as markets had expected (flat m/m vs. expectations of -0.3%). US data was not so flash. Producer prices fell a little more than expected (-0.9% m/m vs. expectations of -0.3%) and housing starts fell 1%, against expectations for an increase. Nevertheless, better than expected earnings from major retail chains, Home Depot and Target, helped ease fears about the outlook for US consumption. Comments from the IMF chief economist that the "global recession has left deep scars" but that the global economic recovery has started were also interpreted as positive. As a result, US stocks recovered some ground after the sharp falls of the previous day. Both the Dow and the S&P 500 are currently up 1%. European stocks are up a similar amount. All up, last night's data flow helped reassure investors that the global economy remains in recovery mode. And as stocks firmed, risk appetite increased, causing investors to pare back "safe haven" trades in the USD and JPY (Asian central banks were noted sellers of USD overnight). Of note, the VIX index (an index of share market volatility) eased off levels around one-month highs. The broad-based weakening in the USD spurred gains in most of the majors overnight. The GBP/USD was one of the strongest performers following the better-than-expected UK data, gaining 2 cents to around 1.6550. Meanwhile, a lift in commodity prices boosted sentiment towards growth sensitive currencies like the AUD and NZD. Combined with talk of an A$50b deal to supply natural gas to China, this helped push the AUD to around 0.8260 from around 0.8200 24 hours prior. There was relatively little reaction to yesterday's RBA minutes from the August board meeting. While concerns about the economic outlook continue to linger, weakness in the US index is expected to be limited in the near term. We anticipate buyers emerging on dips towards the 78 "“ 78.50 region. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.