By Danica Hampton

It was a bit of a roller coaster night for NZD/USD.

Early on, it was all about risk aversion and "˜safe-haven' demand for USD. Worries about the North Korean nuclear situation, concern about escalating German debt and lacklustre Eurozone data put growth sensitive currencies like NZD under selling pressure. After climbing above 0.6200 yesterday morning, NZD/USD was knocked below 0.6100.

However, the NZD/USD weakness was short-lived. Investors shrugged off weak US housing data and focused on a stellar consumer confidence report (Conference Board consumer confidence rose to 54.9 vs. 42.6 forecast). Hopes the US economy is on the road to recovery, combined with analyst upgrades on Apple, triggered a strong surge in US equities. Strong gains on Wall Street and recovering risk appetite saw investors bail out of their "˜safe-haven' USD positions. The USD erased all its earlier strength and NZD/USD quickly rebounded from below 0.6100 to around 0.6250.

This afternoon's NBNZ Business Survey will provide a key pulse check on the NZ economy. The confidence reading may well push higher, amid all the "green shoots" talk, but we suspect the indicators that matter "“ those related to activity and employment/investment intentions "“ will continue to look weak. Also keep an eye out for Fonterra's payout announcement. The 2008/09 payout is currently sitting at NZ$5.20 and we expect the 2009/10 payout to remain around similar levels somewhere in the NZ$5.00-5.50 range.

Fundamentally, we continue to think NZD/USD looks over-stretched. However, currencies can deviate from economic fundamentals for substantial periods of time and USD sentiment will be the key to NZD/USD's near-term fortunes. For today, we suspect dips will be limited to the 0.6140-0.6150 region. Initial headwinds seen around 0.6260, but a break above this level will open up the topside towards 0.6280-0.6300.

It was an extremely choppy night in currency markets. The first half of the night was characterised by USD strength. But upbeat US data reinvigorated risk appetite, which saw the USD weaken as the night progressed.

The USD strengthened broadly through the first half of the night as risk aversion escalated and European equities lurched lower. Investors became extremely concerned about the dire state of the European banking sector, after the Telegraph printed an article in which BaFin (the German financial regulator) warned that German debt could explode "like a grenade". Last night's Eurozone data offered little in the way of support, with industrial orders falling 0.8%m/m in March (vs. +0.8% forecast).

Not only was EUR sold heavily, but rising risk aversion encouraged a wave of cross JPY selling. EUR/JPY skidded from above 133.00 to 131.50 and EUR/USD fell from above 1.4000 to around 1.3860. However, quasi-official demand provided some support below 1.3900.

But the broad based USD strength (and EUR weakness) didn't persist. Investors ignored weaker than expected US housing data (the Case-Schiller index fell -18.7% vs. -18.3% forecast) and instead focused on stellar US consumer confidence data. The US Conference Board consumer confidence index rose to 54.9 in May, well above forecasts of 42.6. Hopes the US economy is on the road to recovery, combined with strong gains across technology stocks (after a brokerage firm upgraded the outlook on Apple), saw Wall Street chalk up strong gains. The S&P500 is currently up 2.4%.

Strong gains across global equities reinvigorated risk appetite and reduced "˜safe-haven' demand saw the USD reverse its earlier gains. Before long, EUR/USD was back reaching for the stars and sitting back around 1.4000.

While US government bond yields edged higher last night (thanks to upbeat consumer confidence and strong gains on Wall Street), strong demand at last night's US$40b 2-year Treasury bond auction has helped ease some concerns about appetite for US government debt in the face of record fiscal deficits. Last night's auction attracted bids for 2.94 times the amount of bonds on offer (the strongest since September 2007) and the indirect bidders (considered to be a proxy for foreign buyers) totalled 54%, the highest since late 2006.