Opinion: US$ weakness dominates as Kiwi$ strengthens

By Mike Jones The NZD/USD has spent the last 24 hours consolidating above 0.6900. US dollar weakness was the overriding theme in currency markets overnight. Globally, equity markets put in a solid performance which, combined with generally better-than-expected economic data (UK industrial production data was not as bad as feared), helped bolster investors' risk appetite. The S&P 500 rose 0.9% while European bourses are all up around 0.3%. Sizeable gains were also recorded across Asian stock markets yesterday (the Shangai index rose 1.7%, while the Hang Seng was up 2.1%). Our risk appetite index (which has a scale of 0-100%) remains at 45%, close to recent highs and a smidge below the long-run average. Firmer risk appetite encouraged investors to pare back "safe-haven" currency positions and demand for the USD fell away. Sentiment towards the USD soured further as a UN report and surging gold prices (which broke above US$1000/ounce at one point) raised concerns about the reserve status of the USD. EUR managed to breach the optionality barrier at 1.4450 which paved the way for further USD selling, and the USD index eventually reached an 11-month low a touch above 77.0. The weakening USD backdrop spurred gains in most of the majors last night, and NZD/USD was squeezed up to a fresh high around 0.6980. However, it has really been a case of the NZD/USD being dragged along for the ride recently. The NZD has tended to benefit from both the weaker USD and strong gains in the AUD (which reached a new year-to-date high above 0.8650 overnight). Indeed, aside from the USD, the NZD depreciated against most of the other major currencies overnight. From highs around 0.8200 last week, NZD/AUD has fallen 1.5% to around 0.8060. For today, NZD/USD is expected to remain in a 0.6900-0.7000 range as markets await the RBNZ decision, and its revised view on the NZD, due tomorrow. The US dollar weakened sharply overnight, propelling many of the majors to fresh 2009 highs. The USD index fell to within a whisker of 77 "“ an 11-month low "“ as firming risk appetite and concerns over its reserve status weighed. Optimism that the global economy may soon return to growth has supported investors risk appetite in recent weeks. And markets remained in a positive mood overnight. The IMF's Kahn said the global economic may recover a quarter earlier than previously expected, hinting an upwards revision to the IMF's world output forecasts may be in order when they are released later this week. Meanwhile, better-than-expected economic data and hopes M&A activity may be on the rise again (following Kraft's offer for the Cadbury) saw global equity markets post decent gains. The S&P 500 is up 0.9%, the FTSE is up 0.3% and the DAX rose 0.3%. Renewed risk appetite dented US dollar sentiment as investors wound back positions in "safe-haven" currencies. US dollar selling intensified following concerns about the reserve status of the USD. Most notably, rumours China may be diversifying its reserves into Gold helped Gold prices surge above US$1000/ounce for the first time since March 2008. And a UN report said "The dollar's role in international trade should be reduced". Against a backdrop of US dollar weakness, all of the majors made solid gains overnight. EUR managed to breach the 1.4450 option barrier, rising as high as 1.4530 "“ the highest since September 2008. UK July industrial production data was not as bad as feared (-9.3% y/y vs. -10.1% expected) which helped lift GBP to around 1.6500. Solid risk appetite and the weakening USD also prompted broad-based gain in commodity prices, increasing demand for AUD, NZD and CAD. The CRB index (a broad index of commodity prices) rose around 2%, while oil prices surged 5% overnight. The Baltic Dry Index (a measure of shipping activity) increased 1.4% on improving prospects for global trade. Further underpinning AUD was yesterday's Australian business confidence data, which reached a six-year high in August. As a result, AUD posted another year-to-date high overnight above 0.8650. We suspect strong results in today's Australian consumer confidence and retail sales data will be needed for AUD to hold onto these gains in the near-term. With appetite for risk and the significant rebound in equities starting to look a little overextended, we suspect the USD is due for a mild bounce in coming sessions. Initial resistance is eyed around 78.8. All of the research produced by the BNZ Capital team of economists is available here.