Opinion: NZ dollar near 9 month high as US dollar weakens

By Danica Hampton The world is a happy place and risk appetite continues to improve sharply. The NZD/USD opens this morning at the 0.6500 level caught in the broader markets desire for currency risk and seemingly unaffected for now by any onshore economic or fiscal issues. At times in the last 24 hours the NZD has paused, firstly when Finance Minister Bill English's comments on fiscal issues and the overvalued currency hit the wires and later when the first reports of last nights earthquake in Fiordland hit the wires. However, the sentiment in currency markets held sway and encouraged the leveraged and momentum model traders to increase their "long" NZD exposures. Equity markets across the globe have posted solid gains, most in excess of 2.5%, in response to a strong start to the company earnings report season. Data showing increases in Chinese money supply & reserves, as well as their top currency regulator - SAFE (State Administration of Foreign Exchange) "“ relaxing restrictions on offshore investments, all helped colour traders sentiment to own risk FX, especially the commodity block of currencies. Despite good talk of official and sovereign names at times selling currencies (EUR & AUD alluded to), incessant appetite from the investor and leveraged community has taken the DXY (USD index) back to levels not seen since early June. US and UK data releases, detailed later, have not made lasting impact though the GBP has trailed the rest of the major currencies in their ascent. On the local front we have June's Performance of Manufacturing Index today at 1030am which could register a lift, but we expect global difficulties still at play will keep it from reaching the breakeven level of 50. At 10:45am, we anticipate a 0.8% lift in the Q2 CPI, partly driven by an anticipated 0.4% increase in food prices. We wonder if businesses might try to wriggle price increases through, here and there, in a desperate bid to restore profitability (especially for those dealing with exchange rate costs). The maturity of over NZD 2.5 bil of eurokiwi's has passed with no lasting impact on the NZD as yet, end holders of the NZD able to consider new issues or vehicles for their maturing investments. The Uridashi maturing later this month is also attracting some interest to rollover investments from Japanese holders. The 0.6525/0.6550 window of resistance looks key as we open this morning "“ trendline resistance ahead of early June highs towards US 66cents. Immediate support is a moving target, but on the day should be seen ahead of the 0.6400/0.6425 level. The NZDAUD is probing higher, with some noting technical traders calls for a run to the 0.82 handle while we remain above 0.80cents. Majors The eurozone formally entered deflation in June as consumer prices rose by 0.2% on the month, enough to push the headline annual rate into negative territory since the series was first collected. In the short-term, the ECB will come under pressure to ease monetary policy further, and it is interesting to note that ECB officials are already questioning the efficacy of any further rate cuts in order to head-off market pressure. Given the ECB's obvious reluctance to ease further they should be successful in avoiding the need for further cuts, but we might start to see more attempts to talk down the value of the euro instead. A cheaper currency would be one way of avoiding deflation. There are some tentative signs in last night's UK labour data that the pace of deterioration in unemployment is easing back, though we would not be inclined as yet to re-visit our forecast that the rate of joblessness will get close to 10% by the end of next year. FOMC minutes from their June meeting showed most officials judged the economy at risk to further shocks even as they rejected an expansion in asset purchases. Industrial Production & Capacity Utilisation printed with slight improvement on forecasts at -0.4% and 68.0% respectively. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.