By Mike Jones

After a strong start to the week, NZD/USD has spent the last two days trading choppily in a 0.7360-0.7430 range.

Currency markets struggled a bit for direction last night - most of the major currencies tracked familiar ranges. While this is partly a reflection of heightened event risk later in the week, many are also pondering what key themes will drive currency markets in 2010. In particular, how quickly relative growth prospects will take over from risk appetite as the key driver of currencies. For now, it seems to be a case of a bit of both.

Tuesday's surprise Chinese monetary policy tightening elicited the predictable response from Asian equity markets yesterday. The Shanghai index plunged 3.1%, the Hang Seng fell 2.6% and the Nikkei was down 1.3%. However, the fallout had only a limited impact on the NZD/USD, with market chatter suggesting both real money and sovereign accounts remaining keen buyers of NZD and AUD on dips.

Modest gains in global equity markets kept risk appetite on a solid footing overnight, underpinning "growth-sensitive" currencies like the NZD, and limiting demand for the USD and JPY. In contrast, some relatively hawkish comments from Fed speakers Medley and Plosser offered some fleeting support for the USD. With the USD generally caught in a sideways shuffle, the NZD/USD really just bobbled about in a 0.7370-0.7430 range through the night.

This morning's building consents, for November, will probably be a mixed bag. While residential consents could well add to their 12% gain of October, consents for non-residential work will likely keep weakening in a core sense. Australian employment data is also due for release (1.30pm).

If risk appetite remains buoyant and optimism about the 2010 global outlook continues, we'd expect a push higher in NZD/USD towards 0.7450-0.7500 in coming sessions. For today, near-term support on NZD/USD around 0.7360 is expected to hold, while initial headwinds can be expected towards 0.7440.

Most of the major currencies strengthened against the USD overnight. However, currencies were generally confined to recent ranges as the Fed's Beige Book (due this morning) and other important data releases are awaited later in the week.

Gains in GBP led the USD lower overnight. Not only did UK November industrial production data come in stronger than expected (0.4%m/m vs. 0.3% expected). But Bank of England policy maker Sentance suggested the BoE may adopt a "wait-and-see" approach to further policy easing, and that the BoE may have already "increased the amount of stimulus enough". With markets still pricing some chance of an expansion to the BoE's quantitative easing scheme in February, the comments helped GBP surge from around 1.6160 to nearly 1.6300.

Along with the stronger GBP, modest gains in global equity markets weighed on the "safe-haven" currencies like USD and JPY as investors' risk appetite improved. The VIX index of risk aversion fell below 18%, from almost 19.5% the day before. European and US equity markets largely shrugged off yesterday's sizeable losses across Asian equity markets (the Shanghai composite index plummeted 3.1% and the Nikkei fell 1.3%), as investors decided China's policy tightening would not derail growth in the region. The S&P500 is currently up around 0.7%, while the DAX rose 0.3%.

EUR found support from comments from the Greek Finance Minister that Greece will not need a bail out. Rumours of large EUR/USD purchases by sovereign accounts also circulated. However, disappointing German annual GDP figures ensured EUR/USD gains were limited to around 1.4580. A statistics official also said German GDP may have stagnated over the last three months of 2009, after two positive readings in Q2 and Q3.

There was relatively little reaction to hawkish comments from Fed officials Plosser and Medley yesterday. Both suggested high US unemployment is not necessarily an impediment to Fed rate increases.

For today, given the USD is on the backfoot, we suspect it will take a significant improvement in the general tone of the Fed's Beige Book (a survey of economic conditions) to see a strong bounce in the USD. In the short-term we'd expect sellers on bounces towards 77.80 on the USD index, while near-term support is eyed around 75.90.

* Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.