Opinion: Kiwi buoyed by foreign stimuli

By Danica Hampton The NZD/USD has spent the past 24 hours consolidating within a 0.5000-0.5150 range. Strong gains in the AUD/USD provided a bit of support for NZD/USD last night. The AUD benefited from hopes yesterday's RBA action (it cut 100bps to 3.25%) combined with the Rudd governments additional A$42b of fiscal spending will see Australian economy ride through the global recession. News that China and Japan were stepping up their fiscal stimulus plans also helped risk appetite, which triggered a bout of generalised USD weakness. Various sovereign accounts were rumoured sellers of USD last night. EUR/USD surged from around 1.2800 to above 1.3000, AUD/USD climbed from around 0.6350 to above 0.6500 and NZD/USD was dragged up above 0.5100. While the Chinese and Japanese news was somewhat encouraging, we suspect the moves seen in currency markets last night reflected position trimming (ahead of the plethora of data and central bank decisions due later this week) rather than a meaningful shift investor sentiment. Certainly this week's global data (which includes US non-farm payrolls) and central bank decisions are unlikely to inspire much confidence about the global outlook. Nor should we forget the dire state of the NZ economy and that Thursday's HLFS will likely show the labour market has gone from red hot to stone cold. We look for employment to fall 0.6% in Q4's HLFS and the unemployment rate to climb to a 5-year high of 4.6% on Thursday. For today, we look for further consolidation in NZD/USD. Dips are expected to be limited to the 0.5000-0.5020 region. Some headwinds are expected ahead of 0.5150, but a continued recovery in global equities and risk appetite could potentially see NZD/USD push up towards 0.5200. There was little in the way of fresh information to drive markets last night, but against a backdrop of firmer global equities the USD has weakened against most of the major currencies. Both China and Japan stepped up their stimulus plans last night. Premier Wen announced that China would increase its fiscal stimulus by US$19b and the Bank of Japan announced it would buy and hold up to JPY1 trillion corporate shares held by Japanese banks. Meantime, in the US, ending home sales climbed 6.3%m/m in December, well above forecasts for a flat result. The better than expected data, combined with hopes extra fiscal stimulus will help support the global economy helped US equities into positive territory. Against a backdrop of firmer global equities, rumoured selling of USD from various sovereign accounts triggered a squeezed on short currency positions. EUR/USD surged from around 1.2800 to above 1.3000 and GBP/USD climbed from around 1.4150 to nearly 1.4450. While last night's news wasn't too bad, we suspect the moves seen in currency markets reflected position trimming (ahead of the plethora of data and central bank decisions due later this week) rather than a meaningful shift investor sentiment. We continue to think 1.3100 in EUR/USD will prove to great a hurdle in coming sessions. The coming week is packed full of economic data and central bank decisions, none of which are likely to inspire much confidence. The Bank of England is expected to cut rates 50bps to 1.00% this week, and while the ECB will likely keep rates steady this week further rate cuts are expected in March. US non-farm payrolls are forecast to fall 500,000 in January, but given the recent slew of job cuts this could well prove to optimistic. While investors remain concerned about a global recession and policy rates around the world converge, this should keep the USD underpinned in coming weeks. It's worth noting, we've seen a massive sell-off in US interest rates over the past few weeks. After falling to a low of 2.15% on January 15, US 10-year government bond yields have climbed about 70bps to 2.80%. Some of the upward pressure likely reflects improving risk appetite (as investors switch out of "˜safe-haven' government debt into higher yielding assets) but it may also reflect supply issues as investors worry about how the US government will fund its budget deficit. It will be important to keep watching this space, if investors become increasingly reluctant to hold USD denominated assets this may be a potential threat to the USD in coming months. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.