Opinion: Kiwi above 57 USc for first time since January 13

By Danica Hampton NZD/USD extended its gains last night as global equities surged and investors were cheered by the US Treasury's new Private-Public investment program. Under the program, it's proposed that US$75-100b worth of public funds will be combined with about 5% of private investment. Leverage (through the Federal Deposit Insurance Corporation) will enable the fund to buy US$500b worth of distressed assets at a price determined by a competitive auction. Private investors will share the risk and tax payers will share in any potential profits. Investors warmed to the US Treasury plan and strong gains across financial stocks saw global equity markets surge. The S&P500 is currently up 4% and is now about 20% above the low seen on March 6. The strong rebound in global equities and improving risk appetite bolstered demand for growth sensitive currencies like NZD (particularly against JPY). In addition to a range of speculative players, Japanese accounts have shown solid appetite for NZD over the past 24 hours. NZD/JPY surged from below 53.50 to nearly 55.50 and NZD/USD has broken above 0.5700 for the first time since January 13. The recent rebound in NZD/USD has been accompanied by a widening of NZ-US interest rate spreads, which suggests the recent currency gains have a greater chance of being sustained. NZ-US 3-year swap spreads are currently sitting at 2.15%, well up on the 1.53% low seen on March 9. Nonetheless, the recent moves in NZD/USD are starting to look excessive even relative to interest rates spreads. Indeed, with technical indicators like the daily RSI suggesting NZD/USD is "overbought" further dramatic gains will be hard work. For today, the global backdrop of rebounding global equities and recovering risk appetite should ensure dips are limited to the 0.5550 region. On the topside, some headwinds are expected ahead of 0.5750. Growth sensitive currencies like the NZD and AUD outperformed at the expense of the USD and JPY last night as investors warmed to the US Treasury's latest plan to rescue the financial system. US Treasury Secretary Geithner released details of a new Private-Public Investment Program, which will initially buy US$500b worth of troubled or toxic assets. Here are the three key points to the plan: 1. The program will be financed with US$75-100b worth of assets from the US$700b bank bailout package, but the government also hopes to attract about 5% of private capital. The base capital will be leveraged through the Federal Deposit Insurance Corporation. 2. A competitive price action will be used to help set the appropriate price for the toxic assets. 3. In essence, the US government will be subsidising private investment in distressed assets, but the tax-payer will also share in the profits if the assets are eventually sold. Investors were encouraged by the US government's plan to rescue the banking sector. Strong gains across financial stocks saw global equities rebound sharply. European equity indices bounced 2-3%, and the S&P500 is currently up 4.0%. Improving risk appetite, and hopes that the worst of the financial crisis may be behind us, fuelled demand for growth sensitive currencies like AUD and NZD at the expense of "˜safe-haven' currencies like USD and JPY. Solid demand for JPY crosses like EUR/JPY, AUD/JPY and NZD/JPY saw USD/JPY climb from below 95.50 to above 97.00. EUR/USD spent most of the night in a 1.3500-1.3750 range. While solid demand for EUR/JPY provided a bit of support, fears about the flailing Eurozone economy were a heavy weight on EUR/USD. ECB President Trichet acknowledged that Eurozone interest rates could be cut further (currently the cash rate is sitting at 1.50%), but once again warned that there were drawbacks from zero policy rates and this probably wasn't appropriate for the Eurozone. The ECB's stance contrasts with that of the Fed, Bank of Japan, Bank of England and the Swiss National Bank who have all begun some form of quantitative easing. Investors fear the European policymakers seeming reluctance to apply stimulus will end up prolonging the Eurozone recession. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.