By Danica Hampton

The NZD/USD marched higher last night, underpinned by further USD weakness.

There are really two reasons for this latest bout of USD weakness: (1) comments from the newly appointed Japanese Finance Minister made it clear the BoJ was unlikely to intervene to weaken the JPY; and (2) risk appetite continues to improve.

Last night's better-than-expected US CPI and industrial production data helped reinforce the notion that the US recession is over. Growing confidence in the outlook for global growth has seen both equity markets and commodity prices rebound.

The S&P500 is currently up 1.5% and the CRB Index (a broad measure of commodity prices) is up 1.8% overnight. Improving risk appetite has encouraged investors to ditch "safe-haven" currencies like the USD in favour of growth sensitive currencies like the NZD and AUD. As a result, NZD/USD surged above 0.7150 "“ a fresh 13-month high last night.

It's worth noting, NZD/GBP found a 12-year high of above 0.4300 last night. Once again, GBP tended to lag the gains in seen other currencies. Much of the recent GBP weakness is a hangover from recent comments from the Bank of England Governor King (who highlighted a possible reduction in the rate paid on commercial reserves), although last night's UK unemployment data wasn't particularly inspiring "“ the unemployment rate rose to 7.9% (although not quite as bad as the 8.0% forecast by economists).

Nonetheless, the GBP weakness looks overdone and we can't see a compelling reason for NZD/GBP to push higher from here.

For today, the global backdrop of improving risk appetite and a generally weak USD should keep NZD/USD supported on dips towards 0.7050-0.7060. On the topside, there is very little resistance ahead of 0.7200.

While BoJ intervention looks unlikely near-term, just be aware that tonight's Swiss National Bank meeting may well provide an opportunity for further intervention to weaken the CHF against the USD "“ a potential impediment to further USD weakness near-term.

The USD weakened against all the major currencies last night. Not only did investors interpret comments from Japan's Finance Minister as watering down the chances of JPY intervention, but generally upbeat global data helped underpin global equities and risk appetite.

Japan's recently appointed Finance Minister, Fujii, said he opposed currency intervention as long as market moves are "gradual" and noted that current market moves were not rapid. In the wake of the comments, USD/JPY fell to a smidge above 90.00 as it reinforced expectations that the new ruling Democratic Party would be more tolerant of a stronger JPY than the outgoing Liberal Democratic Party.

The USD has weakened about 2½% on a trade-weighted basis since the start of last week. The rapid descent in the USD (as the sharp rise in most other currencies) had investors worried that policy makers may ramp up intervention overtures. Indeed, there have been many whispers of various central banks checking currency rates over recent days. Fujii's comments seemingly ruling out BoJ intervention were seen by some investors as a "green light" to sell USD last night.

The backdrop of firm equities and recovering risk appetite added to the weak USD tone. Wall Street was bolstered by stronger-than-expected US industrial production data (it rose 0.8%m/m in August vs. 0.6% forecast) and the S&P500 is currently up 1.2%. Against a generally weak USD, EUR/USD surged from sub-1.4650 to above 1.4730 "“ its highest level since September 2008.

Adding to the pressure on the USD, US Treasury data showed that foreign investors sold US assets for the fourth straight month in July. Net overall capital outflows from the US increased to US$97.5n in July from a revised outflow of US$56.8b the previous month. However, the release wasn't all bad news for the USD as it also showed that central banks such as Japan and China remained net buyers of USD assets.

While BoJ intervention looks unlikely in the wake of Fujii's comments, we're not yet out of the woods. The Swiss National Bank meet tonight and this could provide an opportunity for a further bout of intervention to weaken the CHF against the USD. The SNB is expected to leave its policy rate unchanged at 0.25%, it will likely continue to warn about the risk of deflation and justify the need to maintain its policies to weaken the CHF. Given the sharp USD weakness seen over recent days, we continue to think some profit-taking is in order near-term. On the USD Index, solid support is expected ahead of 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.