By Danica Hampton

After climbing above 0.7400 yesterday afternoon, NZD/USD dribbled lower last night.

Yesterday's Australian data was surprisingly strong. Retail sales climbed 1.4%m/m in November. Not only was this well above the 0.3% forecast, but it was also the largest monthly rise seen since March. Australia's trade deficit also narrowed to A$1.7b, a touch narrower than the A$1.8b expected.

Coming hot on the heels of Wednesday's stronger-than-expected building approvals, yesterday's data helped convince investors that the RBA will need to hike rates further in coming months. In reaction, AUD/USD surged more than ½ cent to above 0.9260 and, on the coat-tails of the AUD, NZD/USD was dragged above 0.7400.

Overnight, the USD found a firmer footing. Aggressive comments from Japan's newly appointed Finance Minister Kan triggered a broad based sell-off in JPY and this set the scene for generalised USD strength. Kan said he would work with the Bank of Japan to ensure an appropriate USD/JPY level and seems generally less tolerant of JPY strength than his predecessor. Despite reported USD selling from sovereign accounts, the USD remained firm throughout the night.

Hawkish comments from the Fed's Hoenig, who warned that the Fed should not wait too long before tightening rates, also helped USD sentiment. Against a generally stronger USD, the uptrend in NZD/USD stalled.

Market participants are now focused on tonight's US non-farm payrolls for critical clues on the US economy (and the global outlook). The consensus is for flat jobs growth in December.

For today, in the lead up to tonight's non-farm payrolls, we look for NZD/USD to stay confined by a 0.7300-0.7380 range.

The USD firmed against most major currencies last night, helped by hawkish comments from the Fed's Hoenig and JPY negative comments from Japan's Finance Minister.

Kansas Fed President Hoenig said the Fed should not wait too long before tightening policy. While Hoenig acknowledged there was considerable uncertainty about the outlook, with the recovery gaining momentum the process of returning policy to more balanced levels should occur "sooner rather than later".

Comments from Japan's newly appointed Finance Minister Kan sparked a broad based sell-off in JPY. Kan said many Japanese companies were in favour of USD/JPY around 95.00 and said he would work with the Bank of Japan to bring the JPY to an appropriate level. In reaction, USD/JPY surged from around 92.00 to 93.40.

Since early December, USD/JPY has climbed nearly 6 big figures (from around 87.00 to above 93.00). Worries about the flailing Japanese economy (and more recently concern the fiscal deficit may weigh on its sovereign credit rating) has taken a toll on the JPY. It seems the JPY is becoming the funding currency of choice for many "carry trades" "“ as investors are convinced the Fed will act to hike rates before the BoJ. Not only do we look for the uptrend in USD/JPY to continue, but we expect JPY crosses like AUD/JPY and NZD/JPY to trend higher through the first half of 2010.

EUR/USD retreated from around 1.4400 to nearly 1.4300 last night. While the JPY weakness paved the way for a generally firmer USD, the Eurozone data wasn't particularly inspiring either. There was a bit of improvement in the Eurozone business climate indicator, but it still suggests activity in the region is shrinking (albeit at a less sharp pace). The monthly European Commission economic sentiment surveys showed further improvement in December, but remain well below long-run averages. Eurozone retail sales fell 1.2%m/m in November, worse than the flat result forecast. Despite the data, solid demand (rumoured to be sovereign accounts out of Asia) helped support EUR/USD around 1.4300.

As expected, the Bank of England left the policy rate unchanged at 0.5% and held its asset purchase program steady at £200b.

Global equity markets were mixed. The FTSE fell 0.32%, the DAX dropped 0.79% and the S&P500 is currently up 0.19%. Commodity prices were also a little lacklustre. Gold prices fell 0.7% to US$1,130/oz and the CRB Index (a broad measure of commodity prices) fell 0.9%.

* Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.