Weak equity markets and lower risk appetite prompted interest from speculative and leveraged accounts to sell the NZD in favour of the relative "safe-haven" of JPY. As a result, NZD/JPY slipped from 68.40 to nearly 67.00 and this dragged NZD/USD back towards overnight lows around 0.7360. However, it's worth noting that despite the backdrop of falling commodity prices and lower risk appetite the NZD/USD actually held up relatively well. Indeed, with the AUD hit harder by the PBOC's announcement, NZD/AUD is back above 0.8000. This underscores our view that the NZD/USD is getting set for a further move higher. 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. There was certainly nothing in yesterday's Quarterly Survey of Business Opinion to alter our view. The survey tended to fit well with our expectation that the New Zealand economy is set to expand at around trend levels through calendar 2010. Developments in currency markets last night are best described as a bit of a mixed bag. Most of the major currencies traded choppily in familiar ranges. Markets were caught off guard by an announcement from the People's Bank of China that it will increase commercial lenders' reserve requirement ratio by 50bps (as of 18 January). This was the first change in reserve requirements since December 2008 and comes on top of an 8bp increase in 1-year bill yields at last night's PBOC auction. Fears a tightening in monetary policy could slow Chinese demand prompted an immediate slide in commodity prices and commodity-linked currencies such as AUD, CAD and NZD. Gold prices dropped around 2% to $US1130/ounce. Meanwhile, the CRB index (a broad measure of global commodity prices) fell around 1.9%. AUD/USD dropped from above 0.9260 to below 0.9220 and USD/CAD rose from 1.0320 to 1.0360. However, these movements were partly reversed later in the night. A report from Goldman Sachs suggested the PBOC's move was simply an attempt to get ahead of the curve and should really be viewed as positive for risk appetite. A comment from a PBOC official that "our monetary policy stance is still relatively accommodative" also supported sentiment. Nevertheless, weakness in global equity markets pushed risk appetite lower through the rest of the night, spurring demand for "safe-haven" currencies like JPY and USD. In fact, the JPY was the star performer overnight; USD/JPY tumbled from above 92.00 to around 90.90. The US earnings season got off to a relatively lacklustre start. Alcoa reported a lower-than-expected Q4 profit and Chevron said its results would be "sharply lower" than last year (the S&P500 is currently down around 1.2%). November US trade data offered little respite. The trade balance widened by more than expected to -$US36.4b. In contrast, GBP was buoyed by the better-than-expected November UK trade balance (-£6.7b vs. -£7b expected). The BRC retail sales monitor also showed UK retail sales rose 4.2% y/y in December, spurring optimism about a possible recession exit for the UK in Q4. Looking ahead, most of the key event risk for this week is still to come. In particular, European and US industrial production data, the Fed's Beige Book, the ECB policy announcement, US retail sales, and Australian employment data are all due. Should the economic data continue to impress, we suspect optimism about the prospects for growth in 2010 will see growth sensitive currencies outperform at the expense of the JPY and USD. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.