Opinion: Kiwi over 60 USc, but how long will it last?

By Danica Hampton The NZD/USD surged higher on Friday night amid sharp USD weakness. The US non-farm payrolls report showed "just" 539,000 jobs were lost in April, slightly better than the 600,000 forecast. However, the unemployment rate rose to 8.9%, the highest since September 1983. Nonetheless, investors were cheered by the fact the latest payrolls release suggests the US labour market isn't continuing to deteriorate. US equities also rebounded strongly. It seems the results from the Fed's bank stress tests have helped bolster confidence in the financial sector. The S&P500 rose 2.4% on Friday and finished the week up 5.9%. In currency markets, strong gains across global equities and hopes the global is on the road to recovery saw investors ditch "˜safe-haven' currencies like the USD in favour of growth sensitive currencies like NZD. NZD/USD surged from below 0.5950 to above 0.6000 "“ its highest level in 5 months. As a growth sensitive currency, the near-term fortunes of the NZD/USD will depend greatly on whether or not global sentiment continues to improve. We are starting to see "green shoots" and signs of stabilisation in the global economy. However, we think equity markets have become overly optimistic about the timing and strength of the global recovery and are sceptical about global equity markets' ability to hold on to recent gains in the face of rapidly rising global bond yields. This week's local data is unlikely to inspire much confidence in NZ. Friday's retail trade update for Q1 will likely highlight the tough times seen by the retail sector. Things aren't much better in manufacturing, even if the monthly PMI nudges up on Thursday; we expect it to remain in sub-50 in contractionary territory. While NZ's fundamental picture argues for a lower NZD/USD, we're unlikely to see the currency weaken until global equities start to falter. For today, we suspect dips will be limited to 0.5980. Headwinds are expected ahead of 0.6050-0.6075. The USD skidded sharply against most major currencies on Friday night, as a strong rebound in global equities and better-than-expected US non-farm payrolls report reduced "˜safe-haven' demand. The US non-farm payrolls report for April showed a 539,000 drop in jobs. While it's still a lot of jobs lost, it wasn't quite as bad as the 600,000 job cuts forecast and it was the smallest monthly decline since October. Nonetheless, the unemployment rate hit a 25-year high of 8.9%. US equity markets also rose strongly on Friday night. It seems the results from the Fed's bank stress tests have helped bolster confidence in the financial sector. Banking shares rose strongly; JP Morgan Chase shares rose 7.7% and Citigroup shares rose 7.1%. The S&P500 rose 2.4% on Friday and finished the week up 5.9%. Investors viewed the combination of not quite as bad as expected US payrolls, and strong gains in global equities, as further evidence the global economy is on the road to recovery. Reduced "˜safe-haven' demand saw the USD weaken sharply and the DXY Index (as USD index) fell about 1.8%. EUR/USD surged from below 1.3400 to above 1.3650 "“ a six-week high, and GBP/USD jumped from below 1.5050 to nearly 1.5250. Looking ahead, the major question is whether the rebound in risk-correlated asset markets represents a bear market rally or a true recovery. An article in the UK Telegraph over the weekend points out the Japanese equities saw four violent spikes during the lost decade (lasting 33%, 55%, 44% and 79%) and Wall Street saw seven bear market bounces during the Great Depression (lasting on average 40 days). The UK Telegraph warns the current situation echoes of 1931, where the year began with green shoots and ended with Central Europe mirroring America's demise. There are signs of "green shoots" in the global economy and recent data from the industrialised nations suggests the global economy is contracting at a slower pace. But it doesn't suggest the global economy has started growing again. Nor are there any signs that once global expansion starts that it will sustained, let alone rapid. Once global economic activity does start to pick up, we expect it will be at a tepid pace and suspect global growth will remain below average for a substantial period of time. We think equity markets have become overly optimistic about the timing and strength of the global recovery and a reality check is past due. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.