By Danica Hampton

The NZD/USD climbed to around 0.5990 last night, its highest level in about 5 months. Yesterday's Household Labour Force Survey (HLFS) wasn't quite as bad as feared. The unemployment rate jumped to "just" 5.0% in Q1 (from Q4's 4.7%), which wasn't as bad as the 5.3% forecast.

The detail wasn't that encouraging. Employment fell 1.1%q/q (in line with expectations) and there's some evidence job seekers are opting out of the labour force as the labour force participation rate dropped to 68.4% (from 69.1 in Q4). Nonetheless, in conjunction with yesterday's upbeat Australian jobs data, it was enough to give both NZ interest rates and the NZD a lift.

NZ money markets have moved to price out any chance of further RBNZ easing and are now consistent with the OCR staying at 2.50% for the remainder of 2009. NZ swap rates have also pushed higher; the 2-year swap rate has risen about 25bps to 3.60% this week. We think the market is underestimating the scope for further RBNZ easing and we are still looking for an eventual OCR trough of 2.00% (the recent strength in the NZD simply reinforces the need for further easing in financial conditions).

Overnight, the ECB and Bank of England took centre stage. While the ECB cut rates 25bps to 1.00% and announced plans to buy about €60b in covered bonds "“ relief it wasn't planning to buy government bonds saw EUR/USD spike above 1.3450 and NZD/USD charged north to within a whisker of 0.6000. The Bank of England left rates unchanged, but announced an expansion to its quantitative easing program and this sent GBP/USD sharply lower. It was mainly short-term speculative players and model-driven accounts with an appetite for NZD, but steady demand for NZD/AUD also provided a bit of support.

However, all major currencies fell away sharply as the NY session progressed. After opening in positive territory US equity markets slipped into negative territory, sentiment was clouded by a poor reaction to US government bond auction and worries about General Motors. The results from the US banks stress tests are due later this morning (9:00am NZ time), but comments from Fed Chairman Bernanke and US Treasury Secretary Geithner suggest the results should help reassure markets about the resilience of the US banks.

For today, improving global sentiment should keep NZD/USD underpinned on dips towards 0.5880. Resistance is seen in the 0.6035-0.6040 region.

The USD held steady against most of the major currencies last night as the ECB and Bank of England monetary policy decisions took centre stage.

As widely expected, the ECB cut rates 25bps to 1.00% last night. In the accompanying press conference, President Trichet did not rule out further interest rates cuts and said the extraordinary downturn in the Eurozone region warranted new, unorthodox measures to stimulate the economy. The ECB also announced plans to buy about €60b in covered bonds "” which are bonds secured by mortgage pools or public debt "” as a further measure to promote lending. However, Trichet cautioned the ECB was not yet pursuing a policy of "quantitative easing" like we've seen from the Fed and the Bank of England (where the central banks are buying government debt).

The Bank of England (BoE) left interest rates steady at 0.5%, but in a surprise move said it would expand its quantitative easing program in order to pump more cash into the economy. The BoE said it would purchase an extra £50b worth of corporate and government debt - bringing its total planned purchases to £125b.

In currency markets, the knee jerk reaction to the ECB and BoE monetary policy decisions was to sell GBP heavily against EUR. EUR/GBP climbed about 1.8% from around 0.8790 to around 0.8935 and GBP/USD was dragged from nearly 1.5200 to below 1.4950.

After spiking above 1.3450 immediately after the ECB decision (amid relief the ECB wasn't adopting quantitative easing), EUR/USD also drifted lower as the night progressed. While we've seen tentative signs the pace of contraction in the Eurozone may be easing (last night's German factory orders bounced 3.3% in March vs. -1.0% forecast), next week's German Q1 GDP is expected to be terrible. German GDP is expected to have contracted 3.0% in Q1 "“ that's a whole lot worse than the -1.5%q/q estimate for the UK and the -1.6%q/q estimate for the US. GDP for the whole Eurozone region is expected to have fallen 2.1% in Q1, leaving the region on track for annual growth to contract 3.8-4.0% in 2009. Ugly.

A slide in global stock markets tempered risk appetite a little. Not only are investors nervous ahead of the US bank stress testing results, but General Motors announced its running through its cash reserves at an alarming rate (it has a June 1 deadline to cut debt and expenses or file for bankruptcy). The poor response to the US government bond auction (which saw US 10-year bond yields rise from 3.20% to above 3.30%) also provoked worries the rising cost of capital may hinder the US recovery. The FTSE finished flat, the DAX slipped 1.6% and the S&P500 is currently down 1.7%.

The results from the US banks stress testing are due later this morning (around 9:00am NZ time). Various sources suggest 10 out of the 19 largest banks will require extra capital. However, Fed Chairman Bernanke hopes the results will allow markets to have "greater confidence that they know the condition of the banks" and expects markets to be "reassured that banks will be strong and able to lend even if the economy is worse than currently expected". It will be interesting to see whether or not the stress testing results revive confidence in the financial sector "“ any rebound in Asian equities will likely help support risk sensitive currencies like JPY crosses.

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