Opinion: Kiwi rallies after Obama's spend big speech

By BNZ Currency Strategist Danica Hampton NZD/USD has surged over the past 24 hours, from below 0.5250 yesterday morning to above 0.5450 last night. Overnight, much fuss was made about US President-elect Obama's announcement of a massive public infrastructure program for 2009. And reportedly, a bailout deal for the US automakers is also closer to being finalised. Some reports suggest about US$15b of the US$25b currently allotted for fuel efficiency research will be diverted to the car industry. Investors were seemingly cheered by the US fiscal spending news and global equities rebounded strongly. The FTSE climbed 6.0%, the DAX 7.6% and the S&P500 is currently up about 3.0%. The impressive recovery in equities helped revive demand for growth sensitive currencies like NZD particularly against USD and JPY. Some real-money demand for NZD was also noted by macro-driven accounts out of Asia. EUR/USD was squeezed violently from below 1.2750 to around 1.2970 and NZD/USD was dragged up above 0.5450. While bigger picture we continue to see downside risks for the NZD/USD, expect the currency to take its near-term cues from global equities. Should we see further gains in global equities over the next few days, NZD/USD has the potential to be squeezed back up towards 0.5600. However, given the backdrop of slowing global growth and fragile risk appetite, the NZ recession and falling NZ interest rates, we expect bounces towards this level will attract sellers. For today, initial support is seen around 0.5380 (ahead of deeper support ahead of 0.5300). On the topside expect some headwinds ahead of 0.5500.   Most of the major currencies climbed against the USD and the JPY last night as global equity markets extended Friday's gains. The Nikkei climbed 5%, European equities are up 6.0-7.5% and the S&P500 is currently up about 3%. It seems investors have been cheered by the US government's efforts to step-up measures to curb the US recession. President-elect Obama announced a massive public infrastructure program for 2009. Reportedly, a deal bailing out the US automakers is also closer to being finalised. Some reports suggest about US$15b of the US$25b currently allotted for fuel efficiency research will be diverted to the car industry. Commodity prices also staged a bit of a recovery. Crude oil climbed about US$3 to US$43.75/barrel, helped by reports Saudi Arabia had cut supplies to some Asian refineries. And the CRB index, a broad measure of commodity prices, climbed 4.2%. The impressive recovery in stock markets helped revive investor confidence a little and lift currencies off their lows. Weak German industrial production data (it fell 3.8%y/y in October) was brushed aside and EUR/USD surged from below 1.2750 to above 1.2950. GBP/USD climbed from around 1.4700 to above 1.5050, but was knocked off its highs by soft UK PPI data. UK input/output PPI fell 3.3%m/m and -0.7%m/m respectively prompting concerns the Bank of England will be forced to cut rates further in coming months. Concern about how the US government will fund its new fiscal promises is also weighing on investors minds. As such, it's probably a good time to have a word how quantitative easing may affect the USD. At first glance, you might think increasing the US money supply would undermine the USD "“ but the key in this relationship is inflation. If increasing the money supply, triggers inflation and erodes the purchasing power of US currency, it will weigh on the USD. However, the current global backdrop is disinflationary and many investors are actually quite worried about deflation. Against this backdrop, quantitative easing is unlikely to stoke inflation and so it is unlikely to result in significant USD weakness. Certainly, the Fed will need to be wary of running quantitative easing for too long (or it will risk triggering inflation as US activity recovers). But for at least the next 3-6 months, we think inflation expectations will be a non-issue and so quantitative easing is unlikely to weigh heavily on the USD. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.