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Opinion: NZ$ hits 12 month high of 70 USc overnight

Opinion: NZ$ hits 12 month high of 70 USc overnight

By Mike Jones The NZD/USD scaled a new 12-month high a smidge above 0.7000 overnight. Early in the night, strong EUR buying by speculative and model accounts paved the way for more generalised USD weakness. And as US stocks posted small gains, risk appetite improved, and investors exited "safe-haven" positions in the USD. A speech by Chicago Fed President Evans suggested the FOMC is not contemplating rate hikes any time soon, further undermining USD sentiment. Against a backdrop of buoyant risk appetite and USD weakness, NZD/USD was initially pressured higher. Speculative accounts (no doubt targeting 0.7000) were noted buyers of NZD/USD overnight. However, highs above 0.7000 didn't last long for NZD/USD. Late gains in the USD following a mixed report on the US economy from the Fed's Beige Book saw the NZD/USD returned to around 0.6950, close to where it began the night. This morning's RBNZ Monetary Policy Statement (MPS) is the main focus for markets today. We think there's been enough good news over the past six weeks to keep the RBNZ from cutting the OCR. However, with the stronger NZD doing more than its fair share of returning monetary conditions towards more neutral settings, we suspect the RBNZ will remain content to keep rates on hold until mid next year. However, markets anticipate the tightening cycle will begin somewhat earlier, pricing the first RBNZ hike by around March. Given this, we think there is probably some near-term downside risk for the NZD from today's MPS should the RBNZ reassert its intention to keep rates on hold for an extended period. We suspect 0.7000 will remain a high hurdle for the NZD/USD in the near-term, given the NZD/USD's failure to break convincingly above this level overnight. On the downside, initial support is eyed around 0.6900, but a break below this could open up a deeper NZD/USD correction back towards 0.6700-0.6750. The USD weakened against most major currencies overnight. Despite little in the way of new economic data, steady EUR buying put the USD under pressure early in the night. With the key option barrier of 1.4450 now long gone, speculative accounts set their sights firmly on 1.4600. EUR eventually hit a fresh 1-year high a touch above 1.4600, but strong selling interest around the figure soon returned EUR closer to 1.4550. The GBP rose around 0.5% to 1.6540, helped by some slightly better-than-expected consumer confidence data (+63 vs. +62 expected). However, traders were reluctant to place large bets on GBP ahead of the Bank of England's interest rate announcement tomorrow. The BOE is widely expected to leave policy rates unchanged at 0.5%, but there is some speculation the bank's quantitative easing programme may be expanded, which could weigh on GBP. US stocks markets posted gains for the fourth consecutive day (the S&P500 is currently up around 0.8%), encouraging risk appetite and reducing demand for the "safe-haven" USD. The VIX index (a gauge of risk aversion that measures volatility on the S&P500) fell back to around 25%, from closer to 30% early this month. Chicago Fed President Evans noted nascent signs of recovery in the US economy (which were also duly noted in the Fed's Beige Book released overnight), but said that interest rate hikes are "some time down the road". Reduced yield support has undermined the appeal of the USD recently, encouraging investors to move into higher yielding currencies or commodities such as gold. Indeed, US 2-year treasury yields have now fallen close to 40 bps from the recent 1.3% high in early August. And gold prices continue to flirt with US$1000/ounce. Despite generalised US weakness, and small gains in commodity prices (the CRB index is up 0.3%), it is notable that the commodity-linked currencies such as CAD, AUD, and NZD generally underperformed last night and are pretty much unchanged from yesterday. While AUD and NZD nevertheless remain two of the strongest performing currencies over the month to date, this adds to recent signs that the significant rebound in "riskier" assets since March is showing signs of exhaustion. In this sort of environment we suspect investors will be keen to buy the USD on dips. On the USD index, initial support is seen around 77.0. However, a sustained push through this level could see test support around 76.20. ____________ * All of the research produced by the BNZ Capital team of economists is available here.

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