Opinion: NZ$ firm as markets see 25 bps hike in OCR in January

By Mike Jones Another day, another new high in the NZD. Both NZD/USD and the NZ trade-weighted index made new 15-month highs overnight above 0.7440 and 66.80 respectively. The gains in the NZD over the past 24 hours have really been about continued USD weakness and AUD strength. Hot on the heels on Tuesday's surprise RBA rate hike, yesterday's Australian employment report was all the AUD/USD needed to surge above 0.9000 for the first time since August last year. Going into the release, markets had expected a small fall (-10,000). However, even the most bullish analysts were surprised by the 40,600 increase in employment in September. This meant unemployment actually fell, to 5.7%. As AUD/USD rocketed towards 0.9000, NZD was dragged above 0.7400 in its wake. For the second time this week, the Aussie employment data highlighted the contrasting fortunes of the NZ and Australian economies. As such, NZD/AUD has fallen nearly 2% over the week, from a peak of 0.8380 on Tuesday to around 0.8200. Overnight, it was more one-way traffic for NZD/USD. US stocks posted solid gains for the fourth day in a row as US corporate earnings, jobless claims data and retail sales all surprised on the upside. Interest rate decisions from the BoE and ECB were relatively uneventful with both leaving rates unchanged as expected. Buoyant stock markets and optimism about the global recovery lifted investors' risk appetite, spurring demand for growth sensitive currencies like NZD at the expense of the USD. Our risk appetite index (which has a scale of 0-100%) is now back sitting at the long run average of 50%. Also supporting NZD/USD this week has been a reassessment of the timing of the first tightening from the RBNZ. Market pricing is now consistent with a 25bps rate hike from the RBNZ in January. This still looks overly hawkish to us (we have the first RBNZ hike pegged for mid-2010) and adds to our view that the case for a near-term NZD/USD correction is building. Still, with momentum indicators remaining positive we may well see further NZD/USD gains first. It was another positive night for risk appetite last night as stocks built on previous gains and optimism about the global recovery continued. Reflecting this, the USD weakened against all of the major currencies. The upbeat tone began with yesterday's stellar Australian employment data. Contrary to expectations for a 10,000 drop, employment increased 40,600 in September and the unemployment rate dropped to 5.7%. As Australian markets anticipated further RBA tightening, the AUD soared above 0.9000 for the first time since August 2008. Upbeat US data helped the optimism continue. September chain store retail sales registered the first increase in a year (vs. -1.5% m/m expected) and jobless claims fell to a 9-month low (521,000 vs. 540,000 expected). Along with Alcoa's better-than-expected start to the US corporate earnings season, the data helped US stocks put in another solid performance overnight. The S&P500 is up close to 1% to be up around 4% for the week. All this tended to fuel hopes about the global recovery, underpinning further gains in risk appetite and commodity prices (the broad CRB index of commodity prices increased over 2%). The VIX indicator of risk aversion has now fallen to around 24.5%, from nearly 30% at the beginning of the week. Firming risk appetite saw most of the major currencies post strong gains overnight at the expense of "safe-haven" currencies like the USD and JPY. The USD index last night reached a 14-month low of nearly 75.8. EUR received an extra boost following the ECB's decision to leave rates unchanged at 1%. While the decision was very much in line with expectations, ECB president Trichet failed to express strong concern over the level of the EUR, as some had expected. This helped EUR push above 1.4800 at one point during the night. However, Trichet did reaffirm that a strong USD is in the world's best interests. The Bank of England (BoE) also left interest rates unchanged overnight at a record low of 0.5%. The scale of asset purchases was also unchanged at £175 billion. As any fears over an increase to the BoE's asset purchase scheme were allayed, the GBP managed to scrape above 1.6100 for the firs time this week. There is a slew of second tier data due for release tonight, but the focus is likely to remain firmly on the US corporate earnings season. If earnings continue to beat expectations watch out for further downward pressure on the USD. That said, the USD index has found solid support at around current levels (75.90) in the past. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.