By Mike Jones The NZD/USD scaled a fresh 14-month high of nearly 0.7380 over the past 24 hours. All the stars aligned for NZD appreciation yesterday. Ongoing USD weakness, a surprise rate hike from the RBA, and surging business confidence all served to push NZD/USD up to levels not seen since August last year. Yesterday's QSBO further validated the vast improvement in business sentiment seen over recent months. Headline confidence jumped to +36, from -25 three months ago. This survey simply added to the recent spate of "˜good news' about the NZ economy, which has seen real money and macro players remain keen buyers of the NZD.
Overnight, the NZD/USD continued to drift higher. However, it was really a case of riding on the coat tails of the AUD after the RBA's surprise decision to increase its cash rate 25bps to 3.25%. The AUD reached a new 14-month high of nearly 0.8920 on the back of the decision. And the strengthening AUD, combined with another sharp bout of USD weakness, saw the NZD/USD push up to an overnight high of around 0.7375. At the margin, NZD sentiment may have also been underpinned by another solid result from Fonterra's latest online milk price auction. The average price of whole milk increased 5.7% to US$3022/tonne, to be over 60% above the July 2009 lows. Nevertheless, highs close to 0.7400 in NZD/USD didn't last for long. As traders anticipated further RBA tightening, steady NZD/AUD selling was seen throughout the overnight session and the NZD/AUD was eventually knocked back to around 0.8240, from year-to-date highs of nearly 0.8380 yesterday. With NZD/AUD selling weighing on NZD/USD, NZD/USD eventually eased back to around 0.7340. NZD/GBP reached as high as 0.4630 overnight as poor UK industrial production data sent the GBP tumbling. According to our records, this is the highest since June 1984. Still, we remain of the view that NZD/GBP is overstretched and look for a correction towards 0.4200 in coming months. For today, we expect some initial NZD/USD resistance towards 0.7370. Initial support will be found around 0.7250. Improving risk appetite, a rate hike from the RBA and an article suggesting Arab states may stop using the USD for oil trading all combined to send the USD sharply lower overnight. The RBA yesterday surprised markets by increasing its policy rate 25bps to 3.25%. This marks the RBA as the first G20 central bank to raise interest rates since the crisis began. The accompanying statement seemed to pave the way for further hikes "“ "the Board's view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy". As a result, our Australian colleagues now expect the RBA to increase the cash rate twice more before the end of the year. AUD/USD shot up ¾ of a cent in the immediate aftermath of the statement. As traders anticipated further tightening from the RBA (helped by a hawkish article from RBA watcher Terry McCrann), the AUD/USD continued to drift higher overnight to a fresh 14-month high of nearly 0.8920. The RBA's surprise rate hike was interpreted as a positive sign by markets that prospects for the global economy appear good. US and European equity indices posted solid gains for the second day in a row. The S&P500 and the Dow are both up around 1% while European bourses have surged over 2%. Energy stocks were also supported by firming commodity prices. The CRB index (a broad measure of commodity prices) increased about 1%, driven by gains in metals prices. The gold price reached a historic high of nearly US$1040/ounce overnight. Surging equity and commodity markets tended to weigh on the USD overnight, as improving risk appetite encouraged investors to buy "˜growth sensitive' currencies like CAD, EUR and AUD. Indeed, USD/CAD fell to nearly 1.0550 "“ its lowest level in a year "“ on the back of soaring commodity prices and the weakening USD. The USD was put under further pressure following the release of a report from the UK's The Independent which suggested Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the USD in oil trading. However, some of the USD's losses were retraced after Saudi Arabian officials condemned the report as "absolutely incorrect". Against a generally weaker USD, the GBP again underperformed. UK industrial production was far weaker than analysts expected, falling 2.5% in August (vs. expectations of a 0.2% rise). The data added to concerns about the strength of the UK recovery and sent the GBP tumbling from above 1.6000 to nearly 1.5900. With the USD index now approaching recent lows, we suspect a mild bounce may be in the offing in the short-term. Solid support has been found previously around the 76.00 mark. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.