Opinion: NZ$ over 65 USc following better than expected trade figures

By Danica Hampton The NZD/USD climbed about 1 cent last night, from nearly 0.6420 to around 0.6520. The USD started the night on a firmer footing. Chinese officials implicitly reaffirmed the USD's status as the key reserve currency by saying there would be no "sudden changes" to its foreign reserve policy. Against a generally firmer USD, NZD/USD slid to nearly 0.6420. But the weakness was short-lived. A mix of commercial accounts and custodial names showed an appetite for both NZD and AUD. A bevy of speculative punters also jumped on board. Before long, NZD/USD pushed up above 0.6500. The sense that NZ has weathered the global turmoil in relatively good shape has provided a bit of support for the NZD over the past few months. Many investors considered yesterday's better-than-expected trade balance as more relevant and up-to-date than last week's Q1 GDP. May's trade deficit narrowed to NZ$3.0b (vs. NZ$3.6b forecast) as exports fared relatively well. However, it must be noted, that while exports were underpinned by solid volumes, prices are still feeling the pinch thanks to the high NZD. Tonight's online Fonterra auction and Thursday's ANZ commodity price data should provide further clues NZ export prices. While there is some evidence of "green shoots", we are mindful about the fragility of NZ's recovery. We're concerned the recent tightening in financial conditions (thanks to a higher NZD and rising interest rates) could derail the fledging recovery. Today's NBNZ Business Outlook (due 3pm) will be a timely update of whether the previous undertones of recovery remain or if the NZ business sector is becoming doubtful. We suspect the headline business confidence indicator will dip back into negative territory. For today, the global backdrop should keep NZD/USD underpinned on dips towards 0.6470-0.6480. However, concern about the fragility of NZ's recovery and July's impending Eurokiwi and Uridashi maturities should help limit NZD/USD bounces towards 0.6550. It was another roller coaster night in global currency markets. The first half of the night was characterised by a firmer USD. Chinese officials confirmed there would be no "sudden changes" to its policies regarding foreign currency reserves, which are comprised of mainly US Treasuries. United Arab Emirates Governor Aziz said a global reserve currency other than the USD was difficult to contemplate and plans to use a new currency would not succeed. The affirmation of the USD's reserve currency status helped support the currency. The USD Index rose to above 80.30 and EUR/USD sank below 1.4000. Disappointing UK mortgage approvals (which rose to just 43,400 in May vs. 46,000 forecast) helped knock GBP/USD to around 1.6430. However, the USD strength didn't last. Positive gains across equity markets in Europe and the US eased "˜safe-haven' demand for USD and encouraged demand for risk sensitive currencies like JPY crosses. Energy and material stocks pulled equity markets higher, after crude oil prices jumped more than 3% to above US$71/barrel. Oil prices were bolstered by supply concerns after Nigerian militants said they attacked the country's infrastructure. European markets rose 1.5-2.5%, and the S&P500 is currently up 0.9%. Upbeat Eurozone data also helped underpin EUR/USD, which rose from sub-1.4000 to around 1.4100. A survey by the European Commission showed that economic sentiment improved at a faster than expected pace in June. The business climate index rose to -2.97 in June up from May's -3.11. The economic sentiment index rose to 73.3 from May's 70.2. While the Eurozone economy seems to have passed the worst of the downturn, GDP still looks on track to contract in Q2. EUR/USD has struggled to break above 1.4140-1.4150 over the past fortnight; another failure at this level may suggest a correction back towards 1.4000 is on the cards. There is a truckload of economic data scheduled this week, but it will take a large surprise to see currencies break out of recent ranges. The key release will be Thursday's US non-farm payrolls (US markets are closed on Friday for Independence Day), but Japan's Tankan business sentiment survey is due Wednesday. The ECB meet on Thursday, although we're not expecting any change to the refinancing rate or any significant comments from Trichet. We'll need to see the USD Index break out of its recent 78.00-82.50 range to convince us a new trend is starting.