Opinion: Kiwi gains as investors dump devalued US$

By BNZ Currency Strategist Danica Hampton NZD/USD climbed steadily last night, underpinned by a dramatic surge in EUR/USD and a broadly weaker USD. EUR/USD was propelled from around 1.3000 to a two-month high of 1.3400, as short-term traders targeted stop-loss levels and option barriers. Comments from ECB's Weber hinting the ECB may not cut rates in January, combined with position squaring ahead of the Christmas break and lingering concerns about how the US government will fund its fiscal promises weighed broadly on the USD. NZD/USD was dragged along for the ride and rebounded from 0.5450 to around 0.5570. While not reflect in last night's currency moves, the news suggests the world is still in a dire state. US weekly jobless claims rose to 573,000 in the week ending December 7 and continuing claims have exploded to levels not seen since 1982.  And both the Swiss National Bank and the South African central bank cut interest 50bps. Locally, the news isn't any much better. The BNZ Business PMI plunged to another record low of 36.4, consistent with NZ manufacturers being battered by both the global slow-down and the NZ recession. November's REINZ housing showed that house prices fell 4.1%y/y and house sales are down 44% on a year earlier. Today's retail spending will likely show flat spending for October, as the positive effect of tax cuts is outweighed by lacklustre auto sales and the drop in petrol prices. While bigger picture we continue to see downside risks for the NZD/USD, the currency will take its near-term cues from global equities and USD sentiment. Should global equities continue to stabilise and the USD remain weak, NZD/USD will likely remain well supported in the lead up to Christmas. However, given the backdrop of slowing global growth and fragile risk appetite, the NZ recession and falling NZ interest rates, we continue to think bounces will attract sellers. It's worth noting, NZD/USD is now above the 0.5320-0.5520 "fair value" range implied by our short-term valuation, suggesting there isn't a compelling fundamental reason to chase NZD/USD higher from here. For today, expect bounces to be limited by 0.5580-0.5600. While initial support is seen around the 0.5490-0.5500 region.     The USD weakened against all the major currencies last night. The USD even lost ground to the CHF, despite the Swiss National Bank cutting interest rates 50bps to 0.50% last night. Against a generally weaker USD, EUR/USD was squeezed violently through stops in the 1.3050 region and rocketed up to a two month high of 1.3400. Position squaring and traders targeting stop-loss levels and option barriers played a large part in the overnight strength. But hawkish comments from ECB council member Weber may have also helped. Weber hinted the ECB may pause at its January meeting and said the ECB should avoid cutting rates into territory where real rates would be negative. Many market participants are starting to question whether we've seen the end of the global deleveraging cycle and the USD strength. While this will happen at some point, we don't think we are there just yet. Despite worldwide measures taken by various central banks and governments, the global economy is still headed for recession. Asset volatility remains high and credit spreads remain wide. Our risk appetite is still sitting around 10% (well below the long-term average level of 50%) suggesting investors are still risk averse. While the global backdrop continues to deteriorate and risk aversion remains rife, we expect investors will keep channelling funds into "˜safe-haven' investments and these global deleveraging flows will continue to underpin the USD and JPY (albeit probably at a slower pace than we've seen over the past few months). As regular readers will know, we don't buy into the idea that the Fed's quantitative easing (effectively increasing the US money supply) will necessarily lead to a weaker USD in the near-term. As written in Tuesday's Daily FX Wrap, the key to this relationship is inflation. Given the current global backdrop is disinflationary (thanks to falling commodity prices and easing global demand pressures), quantitative easing is unlikely to trigger inflation pressures or erode the value of the USD in the near-term. All that said, with markets starting to wind down in the lead up to the Christmas break and many investors already long USD, some position squaring is inevitable. If global equity markets continue to stabilise, don't be surprised if further trimming of short EUR/USD (and other long USD) positions sees the USD remain heavy in the lead up to Christmas. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.