Opinion: Fonterra's NZ$1.25 bln payout boost lifts Kiwi$

By Danica Hampton The NZD/USD chalked up as many runs as Brendan McCullum for the Black Caps, surging from last week's close of 0.7250 to above 0.7400 last night. Some of the recent gains in NZD/USD are due to the USD starting the week on the back foot. Investors shrugged off last week's disappointing US non-farm. Instead, investors seemed focused on the Fed's commitment to keep rates low for an "extended period" and the IMF's comment that the USD is still "on the strong side". However, the NZD got an added boost from Fonterra's upward revision to its 2009/10 dairy payout from NZ$5.10/kg to NZ$6.05/kg. The lift from $5.10/kg is roughly worth an additional $1.25b to aggregate dairy farming incomes, with flow-on benefits to the wider New Zealand economy. Overnight, the main action in currency markets was driven by speculation about merger and acquisition activity. GBP was boosted by chatter that Kraft had put in a hostile bid for UK company Cadbury. CAD benefited from talk that Microsoft is bidding on Canadian company Research in Motion (RIM). The net result was a generally weaker USD. A solid performance across global equity markets and buoyant risk appetite added to the appeal of growth sensitive currencies like NZD (and encouraged investors to ditch "˜safe-haven' currencies like the USD and JPY). Our risk appetite index (which has a scale of 0-100%) rose to 51% last night, well above the 39.5% low seen at the end of October. For today, against the backdrop of a generally weaker USD, we'd expect NZD/USD to remain well supported on dips towards 0.7350. Headwinds are expected towards 0.7450. Locally, we'll see the release of October's electronic card sales, which will provide a timely update of retail spending (ahead of Thursday's release of Q3 retail sales figures). Across the Tasman, NAB updates its monthly business confidence survey and the Head of Domestic Markets at the RBA is speaking. The USD slipped against most major currencies last night. EUR/USD surged from around 1.4850 to above 1.5000 and the USD Index has now fallen about 2.5% from last week's highs. It was really merger and acquisition news that got currencies moving last night. Early in the night, GBP/USD surged from sub-1.6650 to nearly 1.6850 amid chatter that Kraft had put in a hostile bid for UK company Cadbury. However, later once the details of the offer were released (basically Kraft is offering Cadbury 300 pence in cash and 0.2589 Kraft shares) GBP/USD peeled off its highs amid speculation the deal won't be accepted. USD/CAD sank sharply from around 1.0750 to nearly 1.0550 amid talk that Microsoft is reportedly bidding on Canadian company Research in Motion (RIM). RIM is a company that specialises in wireless technology like blackberries, with a current market value of C$36b. Global equities started the week on a firm footing. Investors took heart from the G20's commitment to keep the emergency stimulus measures in place until a global economic recovery was assured. All the corporate mergers and acquisition talk also help lift equity sentiment The DAX rose 2.4%, the FTSE rose 1.8% and the S&P500 is currently up 1.6%. Perky equity markets and buoyant risk appetite added further weight to the USD as it encouraged investors to trim "˜safe-haven' positions. Our risk appetite index (which has a scale of 0-100%) rose to 51% last night, well above the 39.5% low seen at the end of October. Overnight comments from St Louis Fed President Bullard backed up last week's FOMC statement. Bullard told the Financial Times that monetary tightening was unlikely until the recovery was well-established and suggested that US rates could remain near zero for all of next year. Meantime, US interest rates nudged lower following solid demand for the US Treasury's US$40b auction of 3-year government bonds (bid-to-cover ratio of 3.33 and indirect bidders took out 68% of the auction). US 10-year government bond yields fell 3bps to 3.47%. More generally, the absence of USD supportive comments from the weekend's G20 meeting, combined with last week's Fed commitment to keep rates lows for "an extended period", seem to have set the USD up for further weakness this week "“ provided equity markets and risk appetite remains buoyant. On the USD Index, expect bounces to be limited to the 76.50 region. A break below the October low of 74.90, will open up the downside towards 74.00. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.