By Danica Hampton

The NZD/USD spent most of Friday trading choppily within in a 0.7100-0.7200 range.

Worries about the strength and timing of the US recovery took a toll on growth sensitive currencies like NZD on Friday night. Lacklustre US data (durable goods orders fell 2.4%m/m vs. 0.4% forecast, new home sales rose 0.7%m/m vs. 1.6% forecast) saw Wall Street chalk up modest losses and this weighed on risk appetite. The S&P500 fell 2.2% last week and our risk appetite index has slipped to 43% (after briefly rising above 50% last week).

The JPY strengthened markedly following comments from Japanese officials (who suggested that intervention to weaken the JPY was unlikely) and Japanese fund repatriation ahead of half year-end. Against a generally stronger JPY, NZD/JPY skidded from above 65.40 to below 64.40 and this added to the weight on NZD/USD.

Despite the G20's assurances to keep stimulus measures in place until the global recovery takes hold, investors now seem more cautious on the global outlook. With global equities rebounding some 50% from the lows seen in March, and many equity indices now looking stretched relative to valuations, this week's global data (including US non-farm payrolls, US Q2 GDP, the European Commission 's Survey and the UK Q2 GDP) will need to positively surprise to justify the upbeat global outlook currently priced into markets. Any hint of weakness across global equities, or a spike higher in risk aversion, should support the USD at the expense of growth sensitive currencies like NZD.

Locally, this week's National Bank Business Outlook should provide some insight on how the gap between extremely bullish business sentiment and still-weak actual activity will be resolved. We wouldn't be surprised to see the headline confidence measure pull back a little.

Over the coming week, caution about the global outlook will likely keep the USD underpinned and bounces in NZD/USD limited to 0.7240-0.7250 region.

The USD shuffled sideways on Friday night, as investors digested lacklustre US data and losses on Wall Street.

US durable good orders fell by 2.4%m/m "“ the largest monthly decline in about 8 months and well below the 0.4% analysts had forecast. New home sales rose by just 0.7% in August, disappointing forecasts for a 1.6% gain. The lacklustre data raised questions over the strength and timing of the anticipated US economic recovery. The S&P500 fell 0.6% on Friday night (the third consecutive down day) and finished the week 2.2% lower.

Worries about the US economic recovery and the modest losses across Wall Street tempered risk appetite a little. Safe-haven demand provided a bit of support for the USD, but it was really JPY that took centre stage.

The JPY was the strongest performing currency on Friday night. Comments from Japan's Finance Minister Fujii suggested the Ministry of Finance was not inclined to take action to halt the JPY's strength. This sentiment was backed up by Sakakibara (a former Japanese Ministry Official whose intervention actions in the 1990s earned him the nickname "Mr Yen"), who said officials wouldn't be concerned if USD/JPY fell below 90.00, but may consider action if it fell below 85.00.

Not only were the comments interpreted by investors as a "green light" to buy JPY, but Japanese repatriation ahead of 30 September (Japan's fiscal half-year) and reduced risk appetite also provided some support to JPY. USD/JPY fell to a 7½-month low of nearly 89.50.

The G20 communiqué made it clear that the leaders of the world's major economies intend to maintain their emergency support until the recovery is well at hand. While this will provide some relief to investors worrying about a quick exit, it also isn't particularly supportive for the USD as it means that US interest rates will likely remain low for some time to come. Despite the official G20 line, the Fed's Warsh said the US economy has improved and a policy turnaround could come with greater force than is customary.

With global equities rebounding some 50% from the lows seen in March, and many equity indices now looking stretched relative to valuations, investors are becoming less tolerant of softer-than-expected economic data. If this week's economic news (including US Q2 GDP, non-farm payrolls, the European Commission's Survey and the UK Q2 GDP) fails to justify the upbeat global outlook currently priced into markets, look out for a correction across global equities. We do not expect the USD weakness to continue at the same pace over the coming months and expect the USD Index to find solid support on dips towards 75.90-76.00.

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