By Mike Jones The NZD/USD has spent the last 24 hours consolidating within a 0.6870-0.6950 range. Overnight, a softer USD provided a base for small recovery in the NZD/USD. Fed chairman Bernanke was in focus as he offered a relatively downbeat assessment of the US economy to Congress. Bernanke also rammed home the idea that Fed policy tightening is still not on the cards, despite the increase in the Fed's discount rate last week. January's 11.2%m/m slump in new home sales (to the lowest level since records began) simply reinforced the fragile state of the US economy, and US interest rates fell across the board. The prospect of lower US rates for longer saw equity markets post modest gains and commodity prices rise. The S&P500 is currently up around 0.9% while the CRB index (a broad measure of global commodity prices) lifted 0.7%.
The combination of a weaker USD, and gains in equities and commodity prices should have provided the perfect backdrop for NZD strength. Instead, NZD/USD really just meandered up to around 0.6940, underperforming its peers. Once again, it was weakness in NZD/AUD that held back further gains in NZD/USD. Noted RBA watcher Terry McCrann was on the news wires last night saying the RBA will "almost certainly" raise interest rates 25bps at next weeks meeting. As a result, NZD/AUD dribbled lower through the night, eventually reaching a fresh 9-month low around 0.7750. Today's NBNZ business survey will probably show net confidence came off a bit in February. Still, signs of ongoing economic recovery should be evident in the details, even if a bit more caution creeps in. Given NZD/AUD is playing a key role in dictating NZD sentiment at present, we'll also be watching Australian capex data due out at 1.30pm (NZT). Near-term support on NZD/USD is eyed towards last night's low of 0.6870. The USD weakened against most of the major currencies last night. Fed chairman Bernanke's semi-annual testimony before Congress was relatively uneventful. At the margin, Bernanke struck a slightly more downbeat tone on the state of the US economy and, as expected, continued to caution that economic conditions are "likely to warrant exceptionally low levels of the federal funds rate for an extended period." A surprising drop in US new home sales underscored the notion higher rates in the US won't be needed anytime soon. Home sales plunged 11.2% to 309,000 in January "“ the lowest level since records started in 1963. While US stock markets were buoyed by the prospect of low US rates for a while longer (the S&P500 is currently up 0.9%), US bond yields fell. 2-year US Treasury yields slipped around 5bps in the wake of the softer data and the implied yield on the December Fed Funds contract fell to 0.48% from 0.53%. Not only did falls in US interest rates weigh on the USD last night, but rumours did the rounds of widespread USD selling by various central banks. Traders took the opportunity to trim short positions in EUR and GBP. This was despite ratings agency S&P saying further downgrades of Greece's sovereign rating are possible within a month. EUR/USD briefly shot above 1.3600, before settling back to around 1.3550. Better-than-expected Eurozone new orders data also provided a prop for EUR, rising 0.8%m/m in December, compared to forecasts for a 1.0% decline. Fears over an extension to the Bank of England's quantitative easing programme continue to hang over GBP. Bank of England MPC member Posen hit the wires last night reinforcing Governor King's comments yesterday that the BoE may well resume its QE policy should the UK economy continue to disappoint. As a result, GBP/USD failed to push much above Friday's 9-month low of around 1.5360. Looking ahead, further evidence of the degree of divergence among the world's major economies will be provided tonight by Q4 GDP estimates for the US and the UK (last night's Q4 German GDP data was flat as expected). Also, keep an eye out for any announcement regarding a rumoured Greek 10-year bond offering. Any difficulties with the bond's sale will bring concerns over Greece's fiscal woes back to the fore, which could see EUR/USD test support around 1.3450. All up, we suspect EUR/USD will struggle to sustain rallies above 1.3600 in the near-term. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.