Opinion: Kiwi$ world's best performing currency on US and Japanese pledges to keep rates low

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. NZD/USD has pushed up to near 2-month highs around 0.7150, while NZD/EUR is sitting at 2-year highs above 0.5200. Risk appetite has been bolstered over the past 24 hours by pledges by both the Fed and Bank of Japan to maintain their extremely accommodative policy stances. While the Fed promised to keep interest rates low for “an extended period”, the BoJ actually eased policy further yesterday by increasing its lending to banks (3-month lending operations were doubled to ¥20t). Global equity markets revelled in the prospect of low interest rates for some time to come. Asian equities rose 1.2-1.9% with European and US indices up slightly less. Against a backdrop of firm equities and robust risk appetite, investors shunned the low yielding USD and JPY in favour of ‘growth-sensitive’, higher yielding currencies like NZD and AUD. EUR came under pressure from heavy EUR/GBP selling (following upbeat UK labour market data) and comments from a German government spokesman that a rescue package for Greece is far from a done deal. As a result, NZD/EUR drifted up to ¬nearly 0.5220 – the highest since March 2007. We suspect further NZD/EUR gains are likely this year. With NZ economic growth set to outpace that of the Eurozone, and the RBNZ expected to hike interest rates earlier than the ECB – we look for NZD/EUR to be around 0.5300 by the end of June. Not only did buoyant equity markets underpin NZD sentiment last night, but the NZD’s yield advantage widened. Reflecting recent falls in US interest rates, NZ-US 3-year swap spreads widened to 292bps, from closer to 285bps at the start of the week. We expect today’s ANZ-RM consumer poll will struggle to hold January’s relatively firm level of 123.6. Still, this is not expected to prevent further NZD/USD gains. In the short-term, NZD/USD dips are expected to be limited to 0.7070, with a push towards 0.7250 looking likely in coming days. The USD has continued to weaken over the past 24 hours, following the Fed’s pledge yesterday to keep interest rates on hold for an “extended period”. As expected, the Bank of Japan eased its monetary policy stance yesterday. The BoJ doubled its three-month bank lending operations to ¥20 trillion in an effort to pull the Japanese economy out of deflation. The knee-jerk reaction saw the JPY strengthen, on relief the easing was not larger. However, this move soon gave way to a softer JPY; USD/JPY edged up from around 90.10 to 90.60. The promise of ongoing accommodative monetary policy from both the BoJ and the US Fed was received with open arms by the markets. The Nikkei jumped 1.2% yesterday, the Shanghai Composite index rose 1.9% and European equities increased 0.5-1% overnight. The VIX index (a proxy for risk aversion) fell to 16.5% – the lowest since May 2008. As a result, investors tended to shun lower yielding ‘safe-haven’ currencies like the USD and JPY in favour of higher-yielding ‘risk sensitive’ currencies like CAD, AUD, and NZD. In fact, USD/CAD fell to 20-month lows of nearly 1.0070 last night, helped by a 1% gain in oil prices. Still, it was GBP that led gains in the major currencies last night. The minutes from the Bank of England’s March meeting were roughly as expected. The BoE’s MPC voted 9-0 in favour of leaving interest rates at 0.5% and keeping the Bank’s quantitative easing target unchanged at £200b. However, February job data showed a surprise improvement in the UK labour market. Jobless claims fell by 32,300, compared to expectations for a 6000 gain. And the January ILO unemployment rate stabilised at 7.8% (vs. expectations of an increase to 7.9%). In the wake of the stronger data, GBP/USD jumped from 1.5220 to 1.5350 and EUR/GBP slipped below 0.9000. Not only did the slide in EUR/GBP weigh on EUR, but a German government spokesman poured cold water on market hopes for a rescue package for Greece. He said “no decisions” had been made on aid for Greece, nor are they likely to be made at next week’s EU summit. As a result, EUR/USD spent the night shuffling about in a 1.3730-1.3810 range. The issue of China’s exchange rate policy appears to be hotting up. Hot on the heels of pressure from both the IMF and the US to revalue the Yuan, a Chinese official said "We oppose the over-emphasis on the yuan's exchange rate." We suspect heightened pressure from the US and others will only serve to delay the eventual relaxation of the Yuan’s USD peg. Our forecasts imply USD/CNY will depreciate by around 5% to 6.50 by December 2010. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here