Opinion: Kiwi$ shoots over 76 USc after 'positive' US earnings and Bollard comments

By Mike Jones It was all one way traffic in the NZD last night. As investors' appetite for risk soared to new highs, the USD was rejected and NZD/USD shot above 0.7600 for the first time since July last year. It was another positive night on global equity markets. The US corporate earnings season continues to impress, which is keeping the global equity market rally alive. Earnings from two large US banks "“ Morgan Stanley and Wells Fargo "“ both exceeded expectations, helping push the S&P500 up 0.6%. This, combined with broad-based gains in commodity prices (the CRB index is up over 2%) further underpinned risk appetite. Our risk appetite index (which has a scale of 0-100%) is now sitting at 58%, well above the long-term average. Against this backdrop, the "safe-haven" of the USD fell out of favour, paving the way for strong gains in all of the major currencies. NZD/USD was no exception, surging over a cent from 0.7500 to nearly 0.7630. Yesterday's comments from RBNZ Governor Bollard simply put an additional leg of support under the rocketing NZD. Bollard said the strong NZD is not necessarily an impediment to raising the OCR. While the knee jerk "˜buy NZD' reaction yesterday afternoon was fleeting, the comments served to increase offshore investors' already strong appetite for currencies like the NZD that are linked into the global good news story. Indeed, solid NZD demand was noted from both macro and model accounts overnight. Gains were even posted relative to the mighty AUD; NZD/AUD pushed up to nearly 0.8200, from around 0.8120 at the start of the night. For the NZD to hold on to recent gains, we'll need to see clear strength in the boatload of Chinese data due to be released today. Investors have been relying on the Asian region to drive the global economy out of recession, so any tempering of this view could see risk appetite, and the NZD, knocked from its highs. The NZ Labour Cost Index will also be released today, which is expected to reveal a slowing in non-wage costs in the year to June. In the short-term, support on the NZD/USD is seen towards 0.7600. The USD fell to fresh 14-month lows overnight as optimism about prospects for global growth pushed risk appetite to new highs. The USD started off the night on a fragile footing following steady demand for GBP/USD on the back of the less dovish than expected Bank of England (BoE) minutes. The October minutes really continued the more upbeat tone started in the September version. Members of the MPC voted unanimously to keep the £175b quantitative easing (QE) program unchanged. As any fears over an extension to QE were assuaged, GBP/USD soared from 1.6460 to above 1.6600. Later in the night, modest gains in US and European equity markets helped risk appetite claw back the previous day's losses, further diminishing demand for the USD as a "˜safe-haven'. US equities found further support from solid Q3 earnings results. Morgan Stanley and Wells Fargo both reported better-than-expected profits for Q3, helping the S&P500 post gains of around 0.6%. The VIX index (a popular proxy for risk aversion) fell to nearly 20%, from nearly 22.5% at the start of the week. Yesterday's comments from San Francisco Fed President Yellen probably further undermined the USD. Yellen said the time for US monetary policy tightening is still some way off, underscoring market beliefs that Fed is on hold for an extended period. Rumours Asian sovereign names were again selling USD overnight added to the mix such that most of the major currencies strengthened overnight. The EUR reached new 14-month highs as attempts by leveraged players to push EUR/USD above 1.5000 finally succeeded. USD/CAD unwound much of yesterday's gains, falling to below 1.0400 on the back of a 3% rally in oil prices. Surging commodity prices (the CRB index is up around 2%) also provided a supportive backdrop for other "˜commodity-linked' currencies such as AUD and NZD. AUD posted fresh 14-month highs above 0.9320. Looking ahead, we suspect downward pressure on the USD will continue in the short-term. The trend recovery in global growth and risk appetite looks set to continue and sustained gains in US interest rates remain some way off. However, we don't think USD weakness will proceed at the same speed we have seen in recent weeks. Officials are becoming increasingly concerned over the weakening USD and rhetoric has been ramped up. Growth global expectations will face a key test today in the form of the Chinese data "˜dump' for September. Given the reliance on Asia to lead the world out of recession, a downside surprise here could see risk appetite falter and temporarily stall the downtrend 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.