By Danica Hampton

NZD/USD pushed higher last night, climbing from 0.5100 to nearly 0.5200.
Early in the night, JPY weakness was the key theme. It's become evident Japan is not immune to the global recession (Japan's Q4 GDP fell 3.3%q/q earlier in the week) and the JPY has lost some of its "safe-haven" status this week.

As a result, we've seen investors square up short positions in JPY crosses like NZD/JPY. NZD/JPY rose from below 48.00 to nearly 49.00 and this provided a bit of support for NZD/USD.
However, NZD/USD struggled to break above 0.5200. After a bright start, US equity markets made a sharp reversal after Hewlett- Packard reported disappointing Q4 sales and the Philadelphia Fed manufacturing index slumped -41.3 in February (vs. -25 forecast).

The quick about-turn in US stocks was enough to knock the steam out of the bounce in growth sensitive currencies like NZD.

Yesterday's NBNZ Regional trends survey indicator fell just 0.1% in Q4, not quite as bad as our economists had feared. While this survey does tend to jump about a bit, it would seem to limit the odds of New Zealand's Q4 GDP being as shockingly bad as we've already seen reported for most other countries around the world. At this stage, we're picking -0.6% for NZ Q4 GDP (27 March). Watch out for today's Crown Accounts release for December. We'll be looking to see how soft tax revenues were during the month and how this has affected the fiscal position.

Look out for RBA Governor Stevens' semi-annual parliamentary testimony (11:30am NZ time) for further clues on the outlook for RBA policy.

For today, the mixed global backdrop isn't providing much in the way of direction. We suspect dips will be limited to 0.5100. On the topside, initial resistance is eyed ahead of 0.5200, but the NZD/USD could push above this if we see a further recovery in global equities and position squaring ahead of the weekend.
Majors

The USD weakened a touch against the major currencies last night. But investors were really focused on JPY weakness and demand for JPY crosses.

The JPY seems to have lost some of its "safe-haven" status this week. It's become evident Japan is not immune to the global recession (Japan's Q4 GDP fell 3.3%q/q) and the sudden resignation of Japan's Finance Minister has raised fears fiscal spending plans will be delayed. Indeed, USD/JPY has surged from around 91.50 at the start of the week to nearly 94.50 last night.

As widely expected, the Bank of Japan left interest rates unchanged at 0.10% last night. However, it announced it would extend its special lending program and buy up to JPY1t of corporate bonds. Despite the Bank of Japan's new plans, solid demand for JPY crosses like GBP/JPY and EUR/JPY saw USD/JPY surge higher.
Steady demand from short-term speculative accounts saw EUR/JPY climb about 2% last night, from 117.50 to above 120.00.

Appetite for EUR/JPY, combined with a "buy EUR/USD" recommendation from a global investment bank (it warned recent concerns over Eastern Europe were excessive) saw EUR/USD surge from 1.2550 to above 1.2750. Last night's European data wasn't quite as bad as feared; Norway's Mainland GDP fell 0.2%q/q vs. -0.6% forecast and Sweden's CPI rose 1.3%y/y vs. 1.0% forecast.

Fears about Eastern Europe have been set aside, at least for the moment. Instead, the media focus is on the UBS agreement to reveal names of US clients the US authorities suspect have engaged in "fraudulent activity". Swiss officials have been at pains to ensure that this is not the end of the bank secrecy laws in their country.
US equity markets have been more or less flat. US economic data was mixed and provided little guidance for investors.

The Conference Board's January index of leading economic indicators rose 0.4%, the second monthly increase. However, the Philadelphia Fed manufacturing index slumped to -41.3 in February (vs. -25 forecast). The FTSE rose 0.3%, the DAX rose 0.2% and the S&P500 is currently flat.

While there is some cautious optimism stemming from Obama's stimulus package, investors are still concerned about the deteriorating global picture. Expect currencies to continue taking their cues from risk appetite and equity market performance near-term.

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