Opinion: Kiwi surges above 57.7 USc overnight, but looks top-heavy

By Danica Hampton The NZD/USD has surged dramatically over the past 24 hours, from below 0.5600 to well above 0.5750. Fears about swine flu appear to have dissipated. Overnight, risk appetite was bolstered by upbeat Eurozone consumer sentiment data and strong gains across global equities. The recovery in risk appetite encouraged investors to buy growth sensitive currencies like NZD against "˜safe-haven' currencies like the USD and JPY. Worse than expected US GDP (it fell at an annualised pace of 6.1% vs. -4.7% forecast) added to the heavy tone in the USD. Over the past 24 hours, NZD/JPY surged from around 54.00 to above 56.00 and NZD/USD climbed to a two week high around 0.5775. However, NZD/USD was knocked off its highs after the FOMC decision triggered a spurt of USD buying. The Fed kept the Fed funds rate target steady at 0-0.25% and made no changes to its quantitative easing program. While most economists were expecting the "no change" decision, some traders were a bit disappointed the Fed didn't announce plans to increase its purchases of US government bonds. We expect NZD/USD to trade with a heavy tone into the RBNZ decision at 9:00am. The central bank is widely expected to cut rates, but debate still reigns on whether it will be a 25bps or 50bps (we're in the 50bps camp). Regardless of the size of today's rate cut, we expect the accompanying statement to leave to door open to further action and the central bank to convey the message that interest rates will remain low for a significant period of time. We continue to look for an eventual trough in the OCR of 2.00% (which is lower than the 2.25%-2.50% priced in by the market). Currency markets have been extremely volatile over the past few days, but we continue to think NZD/USD looks top heavy towards 0.5800 and see the risks are skewed to the downside. Solid support is seen in the 0.5500-0.5520 region. We suspect we'll need to see further downward pressure on NZ swap rates (and NZ-US interest rate spreads narrow) for NZD/USD to sustain dips below this level. It was a roller coaster night in currency markets. The first half of the night was characterised by USD weakness as risk appetite and global equities recovered. However, the downtrend in the USD stalled after the FOMC left interest rates and its quantitative easing program unchanged. Upbeat Eurozone data, combined with 2% gains across European equities, bolstered risk appetite and reduced "˜safe-haven' demand for the USD. The European Commission survey showed that economic sentiment in the Eurozone improved in April. Not only did consumer confidence rise to -31 (better than -33 forecast), but the economic sentiment indicator rose to 67.2 (well above forecast for 65.6). As investors trimmed back "˜safe-haven' positions the USD weakened against a broad range of currencies. EUR/USD surged from around 1.3150 to above 1.3300 and GBP/USD climbed from 1.4700 to above 1.4800. Softer than expected US GDP data did little to help USD sentiment. Data showed that the US economy contracted at an annualised pace of 6.1% in Q1, well below the 4.7% drop forecast. Nonetheless, Wall Street took heart in some of the details of the report "“ namely, the increase in consumer spending and the decline in business inventories. At one point, the S&P500 was up nearly 3%. But the downtrend in the USD stalled after the FOMC decision. The Fed kept the fed funds rate target steady at 0-0.25% and made no changes to its quantitative easing program. While most economists were expecting the "no change" decision, some traders were a bit disappointed the Fed didn't announce an increase in its purchases of US Treasuries. As a result, US 10-year government bond yields jumped from around 3.00% to around 3.10% and a spurt of USD buying knocked EUR/USD from around 1.3340 to 1.3250. Risk appetite also started to ebb a little towards the end of the night. US stock markets erased some of their earlier gains after US President Obama also announced that Chrysler's bankruptcy plans would be revealed tomorrow. The S&P500 is currently up 2.0%. While swine flu wasn't on the radar screen for financial markets last night, the World Health Organisation has raised the flu alert to level 5. The S&P500 is currently up 2.0%. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.