Opinion: NZ$ back making eyes and flirting with 68 USc

By Danica Hampton Ongoing optimism about a global recovery saw NZD/USD flirt with 0.6800 last night. Broad-based USD weakness has been the major theme in currency markets over the past 24 hours. Weak US retail sales (-0.1%m/m vs. expectations of a 0.8% rise) made a sharp contrast to the Eurozone's Q2 GDP, which at -0.1%q/q was not nearly as bad as the -0.5% the market had feared. News suggesting the Eurozone economy may be in better shape than previously thought, combined with solid gains across global equities, helped bolster risk appetite. Against a backdrop of a generally weaker USD and improving risk appetite, NZD/USD climbed from sub 0.6700 to above 0.6800. While some profit-taking on long NZD positions has been noted from macro-driven funds, short-term speculative players and model-driven funds remained keen buyers. Locally, today's focus will be on June's quarterly retail sales report. We're looking for a 0.1%m/m drop in nominal monthly sales and for quarterly volumes to drop 0.4%q/q (a bit worse than the -0.2% drop expected by the market). However, it would need to be a shocker of a retail sales report to dislodge the market's obsession with trying to pick the timing of the first RBNZ hike. Current market pricing is consistent with about an 80% chance of 25bps hike in January and about four five hikes over the next twelve months. This is despite the RBNZ making it clear that the OCR will remain at, or below, it's current level until well into 2010. It's also worth noting, all the major NZ banks having lifted fixed mortgage rates in recent days and we'd expect anticipation of mortgage book related paying to help underpin short-dated NZ swap rates in the near-term. Any widening of NZ-US interest rate spreads will likely add some yield support to the NZD/USD. With the global good news story still very much intact, and risk appetite still solid, we expect NZD/USD to remain well supported on dips towards 0.6720. Generally, it's been a positive night for risk appetite and as a result the USD weakened against all the major currencies. Eurozone GDP fell just 0.1%q/q in Q2, well above the 0.5% contraction forecast by economists. Both the German and French economies grew 0.3%q/q in the second quarter "“ technically this means that these economies are now out of recession, which will take the pressure off the ECB to expand its quantitative easing strategies. However, the US data was less inspiring. US retail sales fell 0.1%m/m in July, well below forecasts for +0.8%. There was also a surprising large jump in jobless claims, which rose by 558,000 (in the week ending August 9). The disappointing US data comes just a day after the Fed said "economic activity is levelling out" "“ its clearest signal yet the US recession is probably coming to an end. Asian and European equities chalked up positive gains and investors were surprised by better-than-expected Q2 Eurozone GDP. While US retail sales were woeful - better than expected earnings from Wall mart, and Ford upping its quarterly production forecasts, helped Wall Street. The DAX rose 0.95%, the FTSE rose 0.8% and the S&P500 is currently up 0.7%. Not only did the upbeat Eurozone GDP inspire confidence in the global outlook, but it presented a stark contrast to the data released across the Atlantic. As a result, EUR/USD surged from just above 1.4200 to above 1.4320. Sovereign accounts out of Asia were reportedly steady sellers of USD throughout the night, but the sharp drop in US interest rates (10-year government bond yields fell about 13bps to 3.58%) probably also helped weaken USD sentiment. We've seen most currencies strengthen sharply against the USD since March, as investors became more confident the global economy was on the road to recovery and "˜safe-haven' positions were unwound. Provided risk appetite and global growth expectations for 2010 remain solid, we'd expect growth sensitive currencies like NZD and AUD to continue gradually trending higher over the coming months. That said, we don't expect to see further dramatic USD weakness over coming months. Not only is the market already short USD, but the US economy is likely to recover ahead of the Eurozone and Japan. In the very near-term, we look for a bit of consolidation in the USD. We suspect dips towards 77.50-77.50 on the USD Index will find solid support. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.