Opinion: Kiwi$ firm as appetite for risky currencies strengthens

By Danica Hampton After starting the week on a fragile footing and dipping to nearly 0.7200 yesterday morning, NZD/USD rebounded strongly last night. Investor sentiment has made a swift about-turn over the past 24 hours. Upbeat global data (including solid Eurozone PMIs, strong Canadian retail sales and much stronger-than-expected US existing home sales) has helped ease some of the concerns about the global outlook. Equity markets have rebounded (the S&P500 is currently up 1.3%) and commodity prices have been dragged higher by a surge in gold (gold prices rose from US$1,155/oz to US$1,174). Our risk appetite index (which has scale of 0-100%) climbed to 56% - its highest level in about a month. The backdrop of rising equities and recovering risk appetite encouraged investors to ditch "˜safe-haven' currencies like USD and JPY in favour of growth sensitive currencies like NZD. Real money accounts and quasi-official names out of Asia were rumoured to be buyers of both AUD and NZD over the past 24 hours. Many short-term speculative players (that had sold NZD over the past few days) were left wrong-footed and the squaring up of positions saw NZD/USD squeezed briefly above 0.7350. Despite last week's sharp falls in the NZD, nothing has really changed on the fundamental front. At 56%, our risk appetite index (which has a scale of 0-100%) remains above the long-run average of 50%. Meanwhile, our short-term valuation model (which is based on commodity prices, NZ-US interest rate differentials, global growth expectations, and risk appetite) suggests a "˜fair-value' range in NZD/USD of 0.7300-0.7500. All up, this suggests there isn't a fundamental reason for NZD/USD to sustain sub-0.7300 levels. The near-term fortunes of NZD/USD will depend on how global sentiment and risk appetite unfolds. However, for today, we suspect dips will be limited to 0.7280. Initial headwinds are expected towards 0.7375-0.7400. The USD weakened against all the major currencies last night. Not only did Fed comments reaffirm that US interest rates would remain low for some time, but better-than-expected US housing data reduced the USD's safe-haven appeal. St Louis Fed President Bullard said the Fed should extend its asset purchase program beyond its planned end date to help stimulate the US economy. This sentiment starkly contrasts that of the ECB. President Trichet has just called for a "gradual and timely phasing out" of its quantitative easing measures, while ECB council member Paramo said the ECB could detail its plans to exit quantitative easing at its December meeting. Bullard's comments helped reinforce the notion that the Fed isn't in a hurry to start raising rates and this took a toll on the USD. Investor sentiment was also cheered by upbeat data. The Eurozone composite PMI rose to 53.7 in November, above expectations for 53.4. US existing home sales rose a whopping 10.1% in October to an annual rate of 6.1m units "“ the highest since February 2007 (likely boosted by new first home owners grant). Nonetheless, the stronger-than-expected data helped alleviate some of the concerns about the global outlook. European equity indices rose about 2% and the S&P500 is currently up 1.3%. Commodity prices also firmed "“ dragged higher by a surge in gold prices. And our risk appetite index (which has a scale of 0-100%) climbed to 56% last night, above the long-run average of 50%. The backdrop of rising equities and improving risk appetite encouraged investors to ditch "˜safe-haven' currencies like the USD and JPY. USD/JPY rose sharply from around 88.60 to 89.20 and EUR/USD surged from 1.4850 to within a whisker of 1.5000. The near-term fortunes of currencies will depend on how global sentiment unfolds. While it's a holiday shortened week in the US (Thanksgiving is on Thursday), US data will provide vital clues on the global outlook. US Consumer confidence, Case-Shiller house prices, Q3 US GDP revisions and the FOMC minutes are likely to be the highlights. However, the German IFO index for November and UK Q3 GDP revisions will also be interesting. All up, we suspect the USD Index will find solid support on dips towards 74.80-90. However, the fundamental picture for the USD is still not strong; the Fed is unlikely to move on rates anytime soon and US government yields remain near record lows. As a result, a push on the USD Index above 77.45 looks unlikely in the short-term. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.