By Mike Jones The New Zealand dollar (NZD) has spent the past 24 hours drifting higher. Surging NZ commodity prices and a cautious recovery in risk appetite propelled NZD/USD to 3-month highs around US0.7320 last night. According to the ANZ commodity price index, world prices for NZ export commodities jumped a further 4.9% in April, following March’s 1.8% gain. Prices are now at the highest level on record and almost 60% above year-ago levels. Still, drought conditions, particularly across the North Island, will limit the boost from commodity price gains in the short term. Confirmation NZ’s commodity export prices are going from strength to strength saw the NZD start last night on the front foot. And a positive night for equity markets and investors’ risk appetite helped the NZD extend its gains. While the Greek crisis does not seem to be going away anytime soon, investors are still relatively optimistic about the strength of the global economic recovery. With last night’s relatively upbeat data reinforcing this optimism, equity markets clawed back some of Friday’s losses and our risk appetite index (which has a scale of 0-100%) rose from 58% to 64%. Reflecting the more buoyant mood, investors trimmed positions in ‘safe-haven’ currencies like the Japanese yen (JPY) last night in favour of ‘growth sensitive’ currencies like the NZD. Indeed, NZD/JPY jumped from 68.60 to above 69.00, underpinning NZD/USD’s climb back above 0.7300. It appears the renewed NZD uptrend we have been warning of for some time is upon us. Indicative of the positive momentum pervading the currency at present, speculative investors increased their net NZD long position by almost 50% last week, to the highest level since August 2008 (12,900 contracts). Overall, we suspect positive short-term fundamentals and firming momentum will support further NZD/USD gains in coming weeks. However, for today, the NZD’s fortunes will be dictated by the Reserve Bank of Australia’s interest rate announcement (at 4:30pm NZ time) in the first instance, and then Fonterra’s latest online milk price auction tonight. Also keep an eye on today’s LCI/WES wage data at 10:45am. Australian market pricing is consistent with a roughly 70% chance of a 25 basis points rate rise from the RBA today. So if the RBA delivers the hike we expect, some modest support for the AUD (and NZD/USD by association) is likely. More important though will be the tone of the RBA’s statement. A signal that rates will need to rise to be above average/normal levels in future could send NZD/AUD tumbling back towards 0.7850. The USD strengthened against most of the major currencies overnight. Not only did the sliding euro (EUR) provide a boost to the USD, but last night’s US data reinforced the notion the US economic recovery is now self-sustaining. US personal spending rose 0.6% in March (as expected), the sixth straight monthly gain, while construction spending ticked up 0.2% (vs. -0.5% expected). Meanwhile, the closely watched ISM manufacturing index managed to outstrip markets’ already robust expectations, increasing to 60.4 in April (60.0 expected). US bond yields climbed 4-5bps in the wake of the stronger data, supported modest gains in the USD. Indeed, USD/JPY climbed from 93.80 to almost 94.80 – the highest in nearly 9 months. Confirmation of the ongoing US recovery buoyed US stocks, which rose 1.3-1.4%. Equity market sentiment was also supported by news United Airlines’ parent plans to buy Continental Airlines for US$3.2b, to form the world's largest airline. Gains in equity markets and generally upbeat global data saw investors return from the sidelines after last week’s spike in risk aversion. The VIX index (a proxy measure of investors’ risk aversion) fell below 20%, after spending most of last week above 21%. Improving risk appetite saw ‘growth-sensitive’ currencies return to favour; the CAD, AUD and NZD all outperformed last night, even as commodity prices remained broadly flat. In contrast, it was another miserable night for the euro. Initial optimism about the size of Greece’s new bailout package quickly faded as markets remained skeptical over whether Greece will be able to deliver the required €30b of wage cuts and tax hikes. It’s also worth noting that Germany still has to secure parliamentary approval to release the bailout money for Greece. Not even the European Central Bank’s relaxation of ratings requirements for Greek bonds, or April’s solid European PMIs could prop up sentiment towards the ailing EUR. Indeed, EUR/USD spent most of the night drifting lower, to eventually reach 1.3200. A test of last week’s 12-month low of 1.3110 is looking increasingly likely in coming days. The week ahead is chock full of event risk. Most notably, the UK election on Thursday will set the tone for GBP in coming months. If the Conservative party manages to secure a majority (which is looking unlikely), we’d expect a sizeable GBP relief rally. Elsewhere, the RBA (today) and ECB (Thursday) are due to meet, with a 25bps hike and no change in policy rates expected, respectively. In the US, a packed schedule of Fed speakers and Friday’s non-farm payrolls report will capture most of markets’ attention.
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