By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. A backdrop of improving risk appetite and widening yield differentials has seen NZD/USD surge nearly 2% over the past 24 hours to a touch above 0.7300. The NZD was initially dragged higher on the coat tails of the AUD. Firming expectations the RBA may hike rates at its policy meeting today have underpinned the AUD over the past 24 hours. Markets now ascribe a roughly 60% chance of a 25bps hike at today's RBA meeting. An article by influential columnist Alan Mitchell yesterday suggested the odds have now tipped in favour of an earlier RBA hike. As the AUD surged towards 0.8750, the NZD was dragged above 0.7200. Expectations of impending RBA tightening also underpinned a rise in NZ interest rates yesterday. NZ-US 3-year swap spreads widened out to a new year-to-date high of nearly 310 bps, providing additional support to the NZD. Watch our sister site www.interestratenews.com.au for the latest news on the Australian economy and Australian interest rates.
Overnight, gains in the NZD continued. US stocks got the week off to a good start, rising 1.3% as the US ISM non-manufacturing survey printed above expectations. European equity indices also put in a good performance and this tended to underpin investors' risk appetite. Improving risk appetite and the G7's failure to talk tough on USD weakness saw "growth sensitive" currencies like NZD and AUD post strong gains against the USD overnight. NZD/USD was eventually pushed above 0.7250, where stop-loss orders to buy NZD/USD were tripped and the currency shot up to a new 14-month high around 0.7310. The focus for local markets today will be firmly on the RBA interest rate decision at 4.30pm. Given markets are not fully priced for a hike, we are likely to see a reaction in the AUD and NZD whatever the decision. Fonterra's next online milk auction will take place tonight. Fonterra's last (September) auction saw the average prices of whole milk powder jump nearly 25%, so attention will focus on whether prices can hold these gains. A strong result similar to previous auctions will no doubt place further support under the NZD. For today, initial resistance is seen ahead of 0.7340, while support is eyed around 0.7250 in the near-term. Broad-based USD weakness continued overnight. With the exception of GBP, all of the major currencies posted gains against the USD. Last night's USD weakness was driven by two factors. Firstly, the statement issued following the G7 finance ministers meeting failed to talk tough on further USD weakness. Pundits had expected a strong signal to the market that further USD weakness was undesirable. Secondly, US stock markets were up strongly overnight, which encouraged risk appetite and prompted some squaring of "safe-haven" positions in currencies like USD and JPY. The S&P500 is currently up around 1.3%, while the DAX and the FTSE are both up close to 0.7%. US stocks were buoyed by the better-than-expected ISM non-manufacturing survey (+50.9 vs 50.0 expected), which popped above 50 (indicative of expansion) for the first time in around a year. Reflective of the improvement in risk appetite, the VIX index (a measure of risk aversion based on S&P500 volatility) fell to around 27% from above 29%. Broad-based USD weakness and rising risk appetite saw "growth sensitive" currencies like EUR, AUD, and CAD appreciate. EUR ground up to around 1.4650 over the course of the night, helped by some better-than-expected data. Eurozone retail sales were not quite as weak as feared (-0.2% m/m vs. -0.5% expected), while the composite PMI increased to 51.1 (50.9 expected). ECB Governing Council member Nowotny said the current level of the Euro posed no major threat to the Eurozone, and merited scrutiny but not action. Commodity currencies like CAD, AUD and NZD performed strongly overnight on the back of firming commodity prices (the CRB commodity price index is up around 0.6%). Meanwhile, GBP and JPY tended to be the laggards. Intervention comments from Finance Minister Fuji weighed on JPY. Minister Fuji said "If currencies show some excessive moves in a biased direction, we will take action." Looking ahead, while further USD weakness is possible near-term, we do not expect the same pace of USD weakness to continue in coming weeks. The USD index is expected be solidly supported on dips towards 75.90-76.00. The next key test for global equity markets, and hence the USD, will be the upcoming US corporate earnings season which kicks off this week. If earnings fail to beat (relatively lofty) expectations, watch out for further weakness in equity markets and lower risk appetite. This sort of environment would likely see renewed "safe-haven" demand support for the USD. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.