By Danica Hampton As widely expected, the RBNZ left the OCR unchanged at 2.50% yesterday. However, the tone of the accompanying statement was a bit more hawkish than what we, and the market, were expecting. Not only did the RBNZ paint a positively rosy outlook for NZ (where growth jumps to 3% in 2010 and then to 4.0% in 2011), but it is now forecasting the first hike in June (sooner than the December hike signal in the September MPS). In reaction, market participants priced in a much more aggressive tightening track. Current market pricing is now consistent with about a 75% chance of a 25bps hike in March and the cash rate rising to around 4.50% by the end of 2010. 2-year swap rates rose about 25bps to 4.60% and the NZD/USD rebounded from sub-0.7100 to above 0.7250. The upward pressure on both NZ interest rates and the NZD was further helped by positive surprises from the NZ PMI (it rose to 51.8 in November from October's 50.6) and Australia's employment report (where the unemployment rate slipped to 5.7% vs. 5.9% expected). After starting the day below 0.7850 NZD/AUD also climbed strongly, but stabilised around 0.7950 after the upbeat Australian jobs report.
Overnight, the NZD extended its gains, helped along by modest gains across global equities and buoyant risk appetite. There were no surprises from the Bank of England or Swiss National Bank (SNB) monetary policy decisions. Although the SNB did warn that it will "act decisively" to stem further CHF appreciation. Before long, NZD/USD had pushed up above 0.7300. So what next for NZD? NZD/USD has really spent the past three weeks trading choppily between 0.7050-0.7300 and we're now at the top end of that range. This morning's comments from Governor Bollard (that currency markets overreacted to yesterday's RBNZ statement) may well encourage a bit of profit-taking as we head into the weekend. As such, for today, NZD/USD may find headwinds around 0.7335. That said, while investors remain convinced that the outlook for growth in NZ in 2010 is brighter than our trading partners, we'd expect the underlying trend in the NZD to be higher. As such, we suspect we'll see the NZD/USD push higher in coming weeks. In this regard, it's worth noting, the recent widening of NZ-US 3-year swap spreads (associated with the sell-off in NZ interest rates) has seen the implied "fair value" range for NZD/USD climb to 0.7350-0.7550. The USD spent much of the night drifting sideways against most of the major currencies. As widely expected, the Bank of England (BoE) kept its key interest rate on hold at 0.5% and left its quantitative easing asset purchase program unchanged at £200b. The BoE is not expected to lift interest rates until at least October 2010. There was little market reaction to the BoE decision, GBP/USD spent the night consolidating within a 1.6200-1.6350 range (after falling heavily yesterday in the wake of the pre-Budget report). The Swiss National Bank (SNB) said the Swiss economy is on the road to recovery, but that deflation risks still remain. As expected the SNB left the policy target range unchanged at 0-0.75% and reiterated that its will "act decisively to prevent any excessive appreciation of the CHF against the EUR". The SNB also said it will discontinue its purchases of CHF bonds. EUR/USD spent most of the night treading water in a 1.4690-1.4760 range. Lingering concerns about the health of the Eurozone has taken the shine off the EUR. Standard & Poor's cut Spain's credit outlook to negative yesterday, hot on the heels of Fitch's downgrade of Greece. However, rumours suggest sovereign accounts have been active buyers of EUR over the past 24 hours, which combined with generally firmer equity markets has provided some support for EUR/USD. Last night's US economic news was a bit mixed. The number of US workers filing for unemployment claims rose to 474,000 last week "“ after five consecutive weekly declines. However, October's trade deficit narrowed to US$32.9b (well below forecasts of US$36.8b) "“ it seems the generally weaker USD is aiding the export sector. Weak demand the 30-year US Treasury auction sparked a sell-off in US interest rates. 30-year government bond yields rose 6bpts to 4.50% - a four month high. More generally, currency markets are struggling to find direction. The Dubai debt default worries have been mostly shrugged off, but concerns about sovereign debt downgrades continue to keep investors cautious. Looking ahead to 2010, we suspect economic fundamentals will play a greater role in driving currencies. However, there is still a lot of uncertainty about how strong the global recovery will be and how the major economies will fare in the year ahead. The USD Index has managed to hold on to its post-payrolls gains and we'll need to see a break below 75.45 to suggest another leg lower in the USD is imminent. Until this level breaks, gains in other currencies like EUR/USD and GBP/USD look limited. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.