Opinion: NZ$ holds above 70 USc as US growth offsets euro worries

By Mike Jones The NZD/USD has spent the last 24 hours consolidating above 0.7000. Most of NZD/USD's time has been spent in a 0.7040-0.7080 range. Overnight, a broad strengthening in the USD knocked some of the wind out of NZD/USD's sails. Upbeat US data reinforced the idea the US economy is gradually strengthening, in contrast to the recent stalling in the Eurozone economies. US housing starts hit their highest level in six months (591,000 vs. 580,000 expected), and industrial production data also positively surprised. As a result, US bond yields pushed higher, helping the USD erase the previous day's losses. Once again, it was EUR which bore most of the brunt of last night's USD strength. EUR/USD plunged over 1.5 cents to nearly 1.3600 as investor focus returned to the region's fiscal woes. In contrast, "˜growth-sensitive' currencies like NZD and AUD were relatively insulated from the firming USD last night. Not only did yesterday's hawkish McCrann article highlight the fact interest rates in the region are likely to head higher, but ongoing interest to sell EUR against NZD and AUD also helped prop up the antipodean currencies. Indeed, NZD/EUR surged a bit over 1% last night to flirt with 23 month highs around 0.5180, and this ensured losses in NZD/USD were limited to around 0.7030. We wouldn't be surprised to see today's ANZ-RM consumer poll knocked back a bit from the strong 131.4 it hit in January. That looked a bit overdone, given the mild trend in actual consumer spending and the faltering housing market. Across the Tasman, RBA Assistant Governor Lowe is speaking on the "Current Economic Landscape" from 11:20am (NZT), The more cautious global backdrop and firming USD means NZD/USD is probably susceptible to further downside in the short-term. However, failing a melt down in Asian equities, we remain of the view dips below 0.7000 will be short-lived. The USD strengthened against all of the major currencies overnight. The USD index rose nearly 1% to reverse the previous day's losses. Last night's batch of US data served as a reminder the US economy is past the worst. January building permits and housing starts remained consistent with a gradual recovery in the US housing sector. Housing starts hit their highest level in 6 months (591,000 vs. 580,000 expected), while building permits eased from last month's 14-month high, as expected (621,000, vs. 620,000 expected). January US industrial production also managed to exceed expectations, rising 0.9%m/m compared to the 0.7% expected. The upbeat data saw US bond yields push higher, providing support for the USD. US 10-year Treasury yields increased around 4bps to 3.69%, while 2-year yields ticked up 2bps to 0.82%. USD/JPY surged from 90.30 to above 91.00 accordingly. Against the stronger USD, it was EUR which again suffered the most. Despite yesterday's news Greece would be given 1 month's reprieve to re-jig its finances, investors decided this was not a panacea for the region's debt problems. Sentiment towards EUR wasn't helped by comments from Nobel Laureate Robert Mundell (known as the "creator" of the euro) who said EUR/USD will not get above 1.4000 for the next decade. Mundell also said Italy (which holds the second largest amount of debt in the Eurozone) is the "biggest threat" to the Eurozone economy. As a result, EUR/USD failed to hold on to yesterday's gains, tumbling from above 1.3750 to almost 1.3600. The Bank of England's February minutes revealed a unanimous vote to take a pause in their quantitative easing scheme. Given the dovish tone of the February Inflation Report this came as a surprise to analysts who had expected a split vote. With a resumption in the BoE's QE programme looking less likely, GBP found limited support. GBP/USD struggled to make headway against the stronger USD, but EUR/GBP slipped from 0.8720 to around 0.8680. The next test for the USD will come in the form of this morning's FOMC minutes from the January meeting. Recall Kansas Fed President Hoenig dissented at the January meeting, voting against maintaining the line an exceptionally low Fed funds rate is required for "an extended period". If this hawkish sentiment is reflected in the minutes, further USD gains could be in the offing. Nevertheless, the USD index has struggled towards 80.60 over the past few weeks so near-term resistance will be found around this level. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.