Opinion: Kiwi$ world's strongest performing currency; over 75 USc

Opinion: Kiwi$ world's strongest performing currency; over 75 USc

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. Broad-based USD weakness and surging risk appetite combined to send the NZD/USD rocketing over 0.7500. Overnight, global equity markets picked up where they left off last week. The US corporate earnings season continues to impress which is supporting the sense that US corporates have emerged from the crisis in okay shape. Both Gannet and Eaton beat estimates last night, helping the S&P500 to a new 12-month high. Fed Chairman Bernanke was also on the wires calling for a clear exit strategy for the US and confirming "Asia appears to be leading the global recovery". Against this backdrop, investors risk appetite received another leg-up. Our risk appetite index (which has a scale of 0-100%) rose to 57%, the highest since September 2008. Investors' optimism about the global recovery also spilt over into commodity markets. The CRB index (a broad measure of commodity prices) rose 0.9%, and oil prices made new highs for the year close to US$79/barrel.

With both risk appetite and commodity prices tracking higher, "˜growth sensitive' currencies like AUD and NZD outperformed. NZD/USD spent most of the night loitering just under 0.7500. But the temptation eventually proved too great and speculative accounts pushed NZD/USD through the rumoured option "˜barrier' at 0.7500, triggering stop-loss orders and sending NZD/USD to nearly 0.7550. Asian and model accounts were also noted as keen NZD buyers overnight. Sentiment towards AUD and NZD was probably further underpinned by a speech from RBA Assistant Governor Lowe yesterday. Lowe reiterated recent RBA rhetoric that rates should gradually be returned to more normal levels and was notably positive on medium-term prospects for the Asian region. In the near-term, NZD/USD direction will continue to be dictated by offshore developments. Although if the RBA continues to sound hawkish in today's Board minutes, watch for a further pop higher in AUD and NZD. For today, support is seen around 0.7480. The USD fell against all of the major currencies last night as strong gains in equity markets saw risk appetite soar to its highest level in more than a year. With little in the way of fresh data out overnight, most of the focus was on central bank comments and the US corporate earnings season. Earnings results from Gannet (the largest US newspaper publisher) and Eaton (a manufacturer) both beat market estimates, while Bank of America raised its price target for Caterpillar (which reports tomorrow). Stronger earnings results spurred optimism that US corporates have emerged from the crisis in okay shape, sending stock indices higher. Indeed, of the companies that have reported so far, 79% have come in above expectations. The S&P500 rose 1% to a new 12-month high. The FTSE and the DAX are both up nearly 2%. Solid performance across global equity markets encouraged investors risk appetite. Comments from Fed Chairman Bernanke reinforcing the need for an exit strategy may have also provided a prop for sentiment. The VIX index of S&P500 volatility (a popular barometer of risk aversion) fell to around 21% "“ its lowest level since September last year. As risk appetite increased, safe-haven demand diminished and the USD was sold across the board. Markets chatter suggests Asian sovereign accounts were active sellers of US dollars last night. "˜Growth sensitive' currencies like CAD, AUD and NZD have generally been the strongest performing currencies over the past 24 hours, as improving risk appetite saw commodity prices lift. Notably, oil prices reached new highs for the year around US$79/barrel. EUR rose from below 1.4900 to flirt with 1.4960. However, markets are a little wary of whether the Eurogroup meeting of finance ministers will express concern about EUR appreciation, and this probably prevented further gains. GBP managed to rise above 1.6400 but underperformed the rest of the market following dovish comments from the Bank of England's (BoE) Posen. Posen suggested the BoE's quantitative easing programme may yet have to be extended to help the UK economy recover. We suspect further USD weakness may be in store this week. The trend recovery in global growth and risk appetite looks set to continue and sustained gains in US interest rates remain some way off yet. However, there is plenty of event risk to watch out for. Tonight brings the Bank of Canada's interest rate decision and the minutes from the RBA's recent Board meeting. Watch out for the release of the communiqué from the Eurogroup meeting. Any intimation of concern at recent EUR strength could halt near-term declines in the USD. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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