By Mike Jones The NZD/USD has spent the last 24 hours consolidating above 0.7300. While NZD/USD briefly flirted with 15-month highs around 0.7400, rumoured optionality and a late strengthening in the USD knocked the NZD/USD back below 0.7350. Currency markets were a little volatile last night. Early on, weakness in the USD continued as media reports about the likely reducing role of the USD as the world's reserve currency continued to circulate. This, combined with some modest gains in commodity prices (gold prices rose to a new high of nearly US$1050/oz), saw "˜growth sensitive' currencies outperform. Ratings agency Moody's also raised its outlook on the global base metals industry.

Against a backdrop of the weakening USD and positive sentiment towards "˜commodity currencies', NZD/USD rose to an overnight high of just under 0.7400. However, rumours of an option barrier around 0.7400 meant the NZD/USD struggled to hold onto these gains. A late rally in the USD (spurred by intervention talk by the Japanese Finance Minister) also weighted on NZD/USD. Of note, recent strength in the NZD/USD has tended to outstrip economic "˜fundamentals'. Our short-term valuation model suggests a "˜fair value' range for the NZD/USD of between 0.7000-0.7200. The US corporate earnings season kicks off this week and if earnings fail to beat expectations, watch out for a correction in global equities and a tempering of risk appetite. Clearly, the prospect of equity and/or commodity markets taking a "reality check" would pose some downside risks for the NZD. What's more, we do not expect USD weakness to continue at the same pace over the coming months. Officials are becoming increasingly vocal on the need for a strong dollar. The balance of these developments suggests the case for a near-term NZD/USD correction is building. However, with momentum indicators remaining positive we may well see further NZD/USD gains first. For today, the rumoured option barrier at 0.7400 may well cap near-term gains. Meanwhile, initial support is seen around 0.7290. Watch out for Australian employment data due out today at 1.30pm. It was a volatile night in currency markets last night. Having initially traded down close to 13-month lows, the USD eventually ended the night broadly stronger against most of the major currencies. Early in the night, steady JPY buying had the USD on the back foot. USD/JPY selling by both leveraged and real money accounts pushed USD/JPY from above 88.80 to nearly 88.00 "“ the lowest since January. While the exact catalyst for the move remains unclear, comments from IMF's deputy director Kato may have assisted the move. Kato said: "According to IMF estimates, the yen's current levels broadly reflect medium-term economic fundamentals". Gains in the JPY then paved the way for more generalised USD weakness. Media reports suggesting the USD's role as the world's reserve currency remains under threat have been coming thick and fast of late, and these probably further weighted on USD sentiment last night. Against a broadly weaker USD, many of the major currencies made new highs overnight. AUD/USD peaked at 0.8950, while USD/CAD fell to a new 13-month low below 1.0540. A 4.3% increase in the Baltic Dry index (an indicator of shipping activity) may have also supported these two "˜growth-sensitive' currencies. EUR rose as high as 1.4730 during the night, helped by some better-than-expected data. German factory orders increased 1.4% in August, slightly stronger than the 1.1% forecast by analysts. This data overshadowed the small downwards revision to Q2 Eurozone GDP (-0.2% q/q, revised from -0.1%). However, later in the night, comments from Japanese Finance Minister Fuji spurred a rapid reversal in JPY strength. Minister Fuji said he was watching foreign exchange moves for now, but may takes some steps if moves become "abnormal". The threat of JPY intervention saw USD/JPY surge back above 89.00 and this spurred a more broad-based recovery in the USD. As a result, earlier gains in most of the major currencies were reversed. AUD fell back below 0.8900, while EUR is back below 1.4700. Equity markets were broadly flat overnight. US markets have been awaiting the start of the corporate earnings season which gets underway shortly with Alcoa. Whether or not earnings manage to beat expectations will be the next key test for equity markets and the USD. If earnings disappoint, some "safe-haven" USD demand may return as risk appetite comes under pressure. For today, support on the USD index is seen at 76.00. Watch out for tonight's interest rate decisions from the BoE and the ECB. Both are expected to keep rates on hold, at 0.5% and 1% respectively.

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