Opinion: NZ$ climbs above 73 USc as global markets see good start to 2010

Opinion: NZ$ climbs above 73 USc as global markets see good start to 2010
By Danica Hampton Since our last daily report on Christmas Eve, NZD/USD has marched higher. In fact, it's climbed from around 0.7050 to above 0.7350. Between Christmas and New Year much of the NZD strength simply reflected market positioning ahead of year-end. Real money accounts were noted buyers of both AUD and NZD, but the price action was likely exaggerated by holiday-thinned markets. Over the past few days, growing optimism about the prospects for growth in 2010 has also helped underpin growth sensitive currencies like NZD. China's PMI rose to 56.6 in December, well above the 55.4 forecasts, confirming that growth in the region is still on track. The UK manufacturing PMI beat expectations (54.1 in December vs. 55.1 forecast) and the US manufacturing ISM also impressed (55.9 in December vs. 54.3 forecast). All in all, the economic news has helped cement the notion that the outlook for 2010 is brighter than that seen in 2009. As a result, we've seen both equities and risk appetite start 2010 on a firm footing. As 2010 starts to unfold, we can also rest easy in the knowledge that the NZ economy continues to claw its way towards brighter times. Not only is the global recovery continuing to support risk appetite and commodity prices, but recent NZ data suggests the NZ economy is on track to expand 2.5%, on an annual average basis, across calendar 2010 (which stacks up favourably against many of our trading partners). It's also worth noting, our short-term valuation model (based on NZ-US interest rate spreads, commodity prices and risk appetite) suggests a current "fair value" range of 0.7250-0.7450 for NZD/USD. For today, the backdrop of buoyant equities and risk appetite should ensure NZD/USD remains well support on dips towards 0.7250. While initial headwinds are expected ahead of 0.7370, we see the risks as skewed in favour of further gains this week. The USD has started 2010 on the back foot. Upbeat global data and buoyant equity markets have seen investors flock to "growth sensitive" currencies and away from the USD. Since Christmas, currency markets have been dominated by profit-taking and position squaring (as US banks faced financial year-end and many other financial institutions prepared for quarter-end). Since Christmas Eve, the USD Index has traded choppily in a 77.20-78.20 range. EUR/USD dipped to nearly 1.4250 before rebounding above 1.4450 and USD/JPY has climbed from around 91.00 to above 93.00. The economic news over the holiday period has been relatively upbeat. The Chicago PMI surprised on the upside, rising to 60.0 in December vs. 55.1 forecast. China's manufacturing PMI rose to 56.6 in December, beating forecasts of 55.4, consistent with a continued strong expansion in the Chinese economy. The good news continued last night. Not only did the UK PMI surpass expectations (rising to 54.1 in December vs. 52.0 forecast), but the US manufacturing ISM was also strong (rising to 55.9 in December above the 54.3 expected). All in all, the economic news has helped cement the notion that the outlook for 2010 is brighter than that seen in 2009. Global equity markets firmed slightly over the festive season "“ capping off an impressive year that saw the S&P500 finish up 24% and MSCI World Equity Index climb 27%. What's more, equity markets have started 2010 strongly. The S&P500 is currently up 1.5%. The USD strengthened markedly in the lead up to Christmas (about 5% in trade weighted terms). Much of this strength reflected market positioning as a string of upbeat US data unnerved those holding short USD positions. With speculative market positioning now looking a bit more balanced, further gains the USD will likely be hard fought (requiring either upbeat US data or worsening risk appetite). This week is full of data and events that might shape currency sentiment. On Wednesday, the FOMC minutes are released, the Fed's Hoeing speaks on Thursday and US non-farm payrolls are due on Friday. The Bank of England also meets this week (although no change is a near certainty). Eurozone retail sales and GDP are released later in the week. Should the economic data continue to impress, optimism about growth in 2010 will likely see growth sensitive currencies outperform at the expense of the JPY and USD this week. * 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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