Opinion: NZ$ climbs through 70 USc as international investors feel luckiest in a year

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. More USD weakness, combined with strong demand from speculative and real money accounts, pushed NZD/USD back above 0.7000. The RBNZ left the OCR unchanged at 2.5% yesterday, as widely expected. The RBNZ reiterated its now long-held view that it expects "to keep the OCR at or below the current level through until the latter part of 2010". This would have come as a disappointment to those who felt that the RBNZ would take a more RBA-like approach and bring forward its suggested tightening cycle. Nonetheless, the reaction in financial markets suggested participants still don't believe the Reserve Bank will be able to hold its line for as long as it suggests. Abstracting from the usual post-Statement volatility, the 2-year swap rate was more or less unmoved and the NZD/USD pressed higher. Market pricing still has the first tightening in March. Ironically, there was more reaction to yesterday's surprisingly weak Australian employment numbers, which saw the NZD/USD initially fall nearly ½ cent. However, the strong gains in NZD continued overnight. US stocks rallied around 0.5%, helping risk appetite to its highest level in a year (our risk appetite index now sits a touch above the long-run average). Besides surging risk appetite, widening interest rate differentials are also supporting NZD strength. A fall in US swap rates saw NZ-US 3-year swap spreads nudge out to 285bps last night (from the 280bps low seen earlier in the week). Our currency track remains much stronger than the RBNZ's updated view. While investors continue to think that growth, both domestically and offshore, will accelerate, the NZD will remain on a gradual uptrend. Nevertheless, we can't help but think the NZD has got a bit ahead of itself and a correction may be in order in coming months. However, in the near-term, with USD sentiment negative and risk appetite solid, we may well see further NZD/USD gains first. We suspect investors will remain keen to buy NZD/USD on dips towards 0.6900. It was a relatively choppy night in currency markets last night. Nevertheless, similar themes prevailed. The US dollar continued to weaken against most currencies "“ the USD index is now down nearly 2% for the week. Optimism about the global economic recovery and the absence of any more "bad" news has seen risk appetite make strong gains this week. Our risk appetite index (which has a scale of 0-100%) rose to a 1-year high overnight close to 51% - above the long-term average. Rising risk appetite has been supported by gains in stock markets. US stocks posted their 5th straight gain last night. The US July trade balance was slightly wider-than-expected (-$32bn vs. -$27.3bn). However, earnings reports from Texas instruments and Proctor & Gamble were encouraging, and a 30-year Treasury auction showed offshore appetite for US debt remains strong. The S&P500 is currently up around 1%. US Treasury secretary Geithner was also on the wires overnight saying the focus of the government should be shifting away from rescue mode towards growth, and this may have also supported investors risk appetite at the margin. With the USD again on the back foot, most of the major currencies continued to appreciate. GBP was one of the strongest performers. As expected, the Bank of England (BoE) left rates unchanged at 0.5%. The BoE's asset purchase scheme was also unchanged. However, there had been some speculation that the Committee could look at reducing the amount paid on reserves at the BoE in order to encourage lending. This did not eventuate and GBP surged as a result, reaching around 1.6650 "“ a one-month high. The Bank of Canada also left rates unchanged last night (at 0.25%). AUD has underperformed over the past 24 hours following yesterday's shocker of an employment result. Australian employers cut over 27,000 jobs in August, contrary to expectations for a more modest 15,000 fall. Not surprisingly, AUD looked a little heavy after the release but the weaker USD has since helped AUD back above 0.8600. With risk appetite firm and global recovery story still intact, we suspect the USD will remain under pressure in the near-term. Look out for Chinese August industrial production and retail sales data due out today for more clues on the strength of Chinese demand. In the US, the focus will be on tonight's University of Michigan consumer confidence survey. ____________ * All of the research produced by the BNZ Capital team of economists is available here.