Opinion: Kiwi$ heads up toward 74 USc as Fed discusses stimulus expansion

Opinion: Kiwi$ heads up toward 74 USc as Fed discusses stimulus expansion
By Danica Hampton NZD/USD nudged higher last night. Early in the night, NZD/USD was dragged down to nearly 0.7300 by a sharp bout of EUR selling. EUR/USD plunged below 1.4300 after the ECB's Stark said the Eurozone would not bail out Greece despite the country's fiscal problems and credit downgrades. However, the weakness was short-lived. USD selling reportedly from real-money accounts and Asian sovereign names help lift both EUR/USD and NZD/USD. Last night's US data wasn't particularly inspiring. The ADP employment index was consistent with a flat result from Friday's US non-farm payrolls. The non-manufacturing ISM rose to 50.1 in December (slightly below the 50.5 forecast, but above the 50 threshold that signals expansion). Nonetheless, investors appear to be relatively confident about the growth outlook for 2010 and risk appetite remains buoyant. The VIX Index (a measure of risk aversion) has fallen from 22% to below 19% since the start of the year. The optimistic global backdrop has encouraged short-term speculative players to buy "growth sensitive" currencies like NZD, particularly against the JPY. NZD/JPY climbed from around 67.00 to above 68.00 overnight and a challenge of 2009's 69.80 high looks likely over coming weeks. Towards the end of the night, the FOMC minutes triggered another wave of heavy USD selling and NZD/USD surged to around 0.7385. The FOMC Minutes reaffirmed that US rates would likely remain exceptionally low rates for an extended period" and that it may be desirable to "provide more policy stimulus" by expanding the Fed's asset purchase program at some point in the future. For today, we suspect dips in NZD/USD will be limited to 0.7340-0.7350. Initial headwinds are expected ahead of 0.7390, but a push higher towards 0.7450 looks likely in coming sessions. Keep an eye out for NZ's trade balance (due 10:45am) and Australia's retail sales (1:30pm). Markets were a bit of a mish-mash last night. Equities were flat, both commodities and US government bond yields rose and the USD weakened. EUR came under heavy selling pressure early in the night. Eurozone industrial orders were a little disappointing, falling 2.2% in December worse than the -1.0% forecast. But the ECB's Stark set a cat amongst the pigeons by saying the Eurozone would not bail out Greece. EUR/USD slipped sharply from above 1.4350 to nearly 1.4280. However, steady demand from real-money accounts below 1.4300 help EUR/USD lift off its lows. As the night progressed, the USD weakened further. Market chatter suggests there was a lot of interest to sell USD from sovereign names. EUR/USD rebounded from sub-1.4300 to above 1.4400 and USD/JPY climbed steadily from around 91.80 to above 92.50. The FOMC minutes added to the weight on the USD. Not only did the minutes reaffirm that economic conditions warrant "exceptionally low rates for an extended period", but the Fed observed that at some point in the future it may be desirable to "provide more policy stimulus by expanding the planned scaled of Committee's large-scale asset purchases". Last night's US data was mixed. The non-manufacturing ISM rose to 50.1 in December. While this was a tad softer than the 50.5 forecast, it is above the 50 threshold that signals expansion in the sector. The ADP employment index fell by 84,000, close to the 75,000 drop expected. This result would be consistent with a flat outcome from US non-farm payrolls on Friday. While Wall Street remains more or less flat, US government bond yields rose (particularly in the longer end of the curve). At one point US 10-year yields were up 7bps to 3.83%, although some of move has been retraced in the wake of the FOMC minutes. Headlines in Asia that a Chinese think-tank was calling for a 10% revaluation of the CNY caused a bit of excitement during the Asian session. While the Chinese economy seems on track to record strong growth in 2010, we suspect Chinese authorities are still worried about the outlook for Chinese exports. As such, we don't think conditions are ripe for a sharp revaluation of the CNY. We look for a slow and gradual CNY appreciation coming year "“ our forecasts have USD/CNY at 6.48 by year-end. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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