By Danica Hampton

NZD/USD has spent most of the past 24 hours trading choppily within a 0.6980-0.7050 range.

The NZD traded with a softer tone through the first half of the night. Yesterday's RBA minutes didn't really shed any further information on the outlook for RBA policy. Yes, the minutes reaffirmed the central bank's upbeat assessment of the global economy and that the RBA is wary of keeping policy too expansionary for too long. However, this wasn't new information. Instead, real money selling of both AUD and NZD out of Asia tended to dominate. Before long, NZD/USD had slipped to around 0.6980.

But as the night progressed, NZD sentiment improved. Stronger-than-expected US retail sales and upbeat comments from Fed Chairman Bernanke lent support to the notion that the worst of the US recession is behind us. Growing confidence in the US economic recovery helped underpin risk appetite and US equities. The CRB Index, a broad measure of commodity prices, is up 2.2% from yesterday. Demand from short-term speculative players helped NZD push higher against "safe-haven" currencies like USD and JPY.

Yesterday's NZ manufacturing data didn't provide too much in the way of insight for Q2 GDP. Manufacturing sales rose 1.8%q/q, but this was fuelled by a large draw-down in inventories. The net result: underlying manufacturing production was probably as weak as we expected. Our economists have left their Q2 GDP pick unchanged at zero.

For today, the improving global backdrop and recovering risk appetite should provide some support to NZD/USD. However, we suspect Friday night's 0.7090 high will likely prove too great a hurdle. Not only do we think that investors will be reluctant to push for further dramatic USD weakness near-term. But with our short-term valuation model suggesting a "˜fair value' range for the NZD/USD of 0.6850-0.7050, there isn't a compelling fundamental reason to chase the local currency higher from here. Initial support is eyed ahead of 0.6950-0.6960. A daily close below 0.6900 is needed to suggest a deeper correction is on the cards.

The USD inched lower against most major currencies last night, as the mix of strong US data, firm equities and upbeat comments from Fed Chairman Ben Bernanke encouraged investors to trim "safe-haven" positions.

US retail sales rose 2.7%m/m in August, well above the 1.9% forecast by economists. Even though sales were likely inflated by the "cash for clunkers" program, the ex-auto figures also surpassed expectations. The Empire manufacturing index also positively surprised, rising to 18.88 in September (vs. 15.0 forecast). Overall, the US data was consistent with the notion that the US recession in bottoming out.

Fed Chairman Bernanke also sounded relatively upbeat, saying that the worst US recession since the Great Depression was probably over. Although Bernanke did caution that the US economy will "still feel like a very weak economy for some time". Nonetheless, Bernanke's comments, combined with the stronger-than-expected US data helped Wall Street and US bond yields chalk up modest gains. The S&P500 is currently up 0.3% and US 10-year bond yields rose 2bps to 3.45%.

Growing confidence in the US recovery helped underpin risk appetite. As investors trimmed back "safe-haven" positions in the USD, growth sensitive currencies like EUR, AUD and NZD tended to strengthen. EUR/USD surged from below 1.4580 to above 1.4680 "“ its highest level since December 2008. The EUR strength came despite a disappointing German ZEW survey. The headline economic sentiment index rose from 56.1 to 57.7 (vs. 60.0 expected), while the current situation rose to -74.0 (vs. -67.5 expected).

Once again, GBP bucked the weakening USD trend. Markets ignored the stronger-than-expected UK CPI data (1.6%y/y in August vs. 1.4% forecast) and focused on comments from Bank of England Governor King. King said the central bank was considering reducing the remuneration rate on commercial banks reserves in order to reduce the incentive for banks to hoard cash. GBP/USD fell from above 1.6650 to nearly 1.6400.

While the USD Index fell to a fresh 1-year low overnight, investors seem to be reluctant to push for further dramatic weakness. There's growing caution about whether officials will ramp up overtures about the recent USD weakness (both the Swiss National Bank and Bank of Japan meet this week) in light of the relatively sharp 2% decline seen in the USD Index last week. We can't help but think that some profit-taking and consolidation is probably 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.