Opinion: Kiwi$ push towards 68 USc likely after strong Fonterra auction

By Danica Hampton NZD/USD was dragged above 0.6700 yesterday afternoon by strong gains in the AUD/USD. The AUD was boosted by better than expected house price data and solid quarterly retail sales statistics. However, there was little in yesterday's RBA announcement that Governor Stevens hadn't already said last week. The RBA left rates unchanged at 3.00% and adopted a neutral bias. Overnight, NZD/USD slipped to around 0.6650 as the USD firmed a little. Modest losses across global equities and worries about intervention encouraged a bit of profit-taking on short USD positions. Patches of EUR/CHF demand sparked some concern about Swiss National Bank intervention and the Canadian Finance Minister talked about the possibility of CAD intervention. Some NZD selling was noted by custodial-type names, but model-driven funds and real-money accounts continue to show an appetite for NZD. Yesterday's ANZ commodity price data was relatively uninspiring. The global price of NZ's export bundle rose 1.0% in June, but the recent currency strength all but erased the gains. In NZD terms, the index rose just 0.1% for the month. Fonterra's online milk price auction was much more encouraging. Whole milk powder prices rose an average 25.8% at last night's auction and this news helped NZD/USD climb from 0.6660 to above 0.6700 first thing this morning. The fundamental backdrop has become more currency supportive over the past few weeks. The outlook for the global economy in 2010 has become brighter, equity markets have climbed some 50% from their March lows and risk appetite has improved markedly. The NZ economy is also showing some signs of improvement (business and consumer sentiment has rebounded off its lows and housing market activity is starting to pick up). For today, we suspect dips in NZD/USD will be limited to 0.6650-0.6660 region. Some resistance is expected around 0.6730-0.6740, but a push higher towards 0.6800-0.6850 looks likely in coming sessions. The USD firmed a little against the major currencies last night, as modest weakness across global equities encouraged a bout of profit taking. After falling to a 10-month low of 77.45 yesterday, the USD Index has rebounded back towards 77.80 overnight. GBP/USD rose to a 9-month high of 1.7005 yesterday afternoon, in the wake of strong UK manufacturing data and upbeat UK bank earnings. However, despite last night's UK construction PMI beating expectations (rising to 47.0 in July vs. 45.0) profit-taking saw GBP/USD slip under 1.6900 last night. It was a similar story for EUR/USD, which slipped back to around 1.4370 after posting a year-to-date high of 1.4445 yesterday. Intervention jitters also provided a bit of support for the USD. Patches of demand for EUR/CHF sparked some concern about Swiss National Bank intervention. And comments from Canada's Finance Minister Flaherty saw USD/CAD spike higher, from 1.0680 to 1.0760. Flaherty said he's concerned with the rapid changed in USD/CAD and added "there are some steps that could be taken to dampen that". Over the past few weeks, investors have become increasingly convinced the global economy is on the road to recovery. Various pieces of data suggest the worst of the global recession is behind us and the outlook for 2010 has brightened meaningfully. Not only have equity markets rebounded about 50% from their March lows (S&P500 is up 48% and the MSCI World Equity Index is up 54%), but money market and credit conditions have also improved markedly. Our risk appetite index (which has a scale of 0-100%) has climbed to around 47% - within a whisker of the long-term average of 50% and well above the 4% low seen in October 2008. As risk appetite improved, the USD has tended to weaken as investors trimmed back "˜safe-haven' positions and felt more comfortable in riskier, growth sensitive currencies. While we've seen the USD firm a little overnight, we don't think this is meaningful shift in sentiment. Provided this week's central bank decisions (RBA, Bank of England and ECB all meet this week) and economic data (including July's US non-farm payrolls report and the US's services ISM) don't dent investors' risk appetite and global recovery hopes we suspect the USD will remain heavy in coming weeks. On the USD Index, near-term bounces will likely be limited to the 78.50 region and a move down towards 75.90-76.00 looks likely in coming weeks. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.