Opinion: NZ$ treads water as markets await Euro rate decision, US employment report

By Mike Jones The NZD/USD has spent most of the last 24 hours in a relatively narrow 0.7220-0.7300 range. It was a fairly lacklustre night in currency markets overnight. For the most part, the major currencies were content to track a sideways range as markets await tonight's ECB interest rate decision and Friday's US non-farm payrolls report. The exceptions were JPY and GBP. USD/JPY rose sharply on comments from the Japanese Prime Minister that the rapid rise in the JPY could not be left "as it is". In contrast, GBP was buoyed by comments from Bank of England chief economist Dale that the UK is emerging from recession and policy makers should be wary of stoking asset prices. GBP/USD managed to squeeze above 1.6680, from around 1.6600 at the beginning of the night.

Not only did the stronger GBP weigh on NZD/GBP, but a large investment bank released a "short NZD/GBP" recommendation as one of their top 10 trades for 2010 (we have been calling for a lower NZD/GBP since the October peaks around 0.4600). As a result, NZD/GBP was knocked back towards 0.4350, and this weighed on the NZD/USD late in the offshore session. Modest declines in stocks and commodity prices also impacted on sentiment towards the NZD, such that NZD/USD finished the night around 0.7220, having previously flirted with 0.7300. Today's local ANZ Commodity export prices are bound to show clearer improvement for November, as the further gains in international dairy prices are logged and the currency, in moderating, turns friend for the month, rather than remaining foe. With fears over the Dubai debt situation now seemingly last week's news, our index of global risk appetite, at 55% (scale of 0-100%), is now pretty much back to where it was prior to the Dubai debacle erupting. As such, we may well see the NZD continue to drift higher from here. Indeed our short-term valuation model suggests a "˜fair-value' range in the NZD/USD of 0.7250-7450, noticeably higher than where we are now. For today though, with some downward momentum still lingering, initial headwinds are expected towards 0.7280. The USD was caught in a sideways shuffle overnight as markets await tonight's ECB rate decision and Friday's non-farm payrolls report. As a result, most of the major currencies tracked familiar ranges. Early in the night, most of the attention was on USD/JPY. Japanese Prime Minister Hatoyama said it was unclear if the recent rise in JPY was temporary, but it could not be left "as it is". In the wake of the comments, USD/JPY rose from around 86.80 to nearly 87.50. Market chatter suggests traders are also wary of betting on further JPY strength giving the Bank of Japan may yet announce further measures to combat deflation and the rising JPY. While gains in USD/JPY initially saw a modest strengthening in the USD, this was later unwound following a spike in GBP/USD. Bank of England (BoE) chief economist Dale (who voted against increasing quantitative easing at last month's BoE meeting) said the UK appears to be emerging from recession and policy makers need to be wary of driving up asset prices with loose monetary policy. UK PMI construction data, while hardly spectacular, also provided no reason to sell the GBP. The PMI index rose to 47.0 in November, a shade better than the 46.9 analysts had expected. As GBP/USD pushed up through 1.6650, stop/loss orders were tripped and GBP/USD enjoyed a brief spurt above 1.6680. EUR/USD tracked a narrow range through most of the night before eventually dribbling off to around 1.5050. IMF European head Belka said the EUR is on the "strong side" but may yet strengthen further on the back of the carry trade. Belka also reiterated previous IMF comments that the Chinese Yuan is undervalued, which is contributing to global imbalances. Looking ahead, with markets now seemingly content to put the Dubai debt situation behind them, a continuation of the gradual weakening USD trend seems likely. In our view, periods of risk aversion - and hence USD strength - will continue to crop up, but will ultimately be short-lived. In the short-term though, there is plenty of event risk to watch out for. The ECB is due to make its latest announcement on interest rates tonight. Rates are widely expected to be left on hold at 1%, but the interest is on the extent to which the Bank fleshes out its exit strategy from unorthodox monetary policy. There has been some speculation the EBC may put an adjustable rate on its 12-month liquidity offering in December. Eurozone October retail sales and Q3 GDP will also be released tonight. However, Friday's non-farm payrolls will be the highlight of the week data-wise. For today, support on the USD index is seen holding around 74.30. This should cap gains in the EUR/USD to 1.5120 in the short-term. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.