Opinion: NZ dollar hits 64 USc as US dollar weakens ahead of Fed rate decision

By Danica Hampton After falling to nearly 0.6250 yesterday afternoon, NZD/USD surged above 0.6400 last night. The USD weakened sharply last night. All it took was a whiff of positive news (in the form of rumours that China was considering cutting its banks' reserve ratios) to bolster global confidence and reduce "˜safe-haven' demand for USDs. Moody's also said the US's triple-A rating could be threatened if the USD lost its status as the main reserve currency and this added to the weight on the USD. Despite pretty lacklustre Eurozone data and the Bank of England Dale's commentary on "clearly awful" UK data, the generally weaker USD saw both EUR/USD and GBP/USD climb about 2½ cents last night. NZD/USD was not immune to the moves seen in broader currency markets. Against a generally weaker USD, NZD/USD was squeezed above 0.6400 as a raft of short-term speculative players bailed out of short NZD positions. There's a lot of uncertainty in currency markets right now and investors are looking to tomorrow's FOMC statement for guidance. While no one is expecting the Fed to change rates or its quantitative easing program, the statement will be closely eyed for clues as to when the Fed's likely to start raising rates. While we expect the USD to remain weak in the lead up to, and probably in the immediate wake of the FOMC, we're not yet convinced the USD is ready to embark on another leg lower. We'll be looking to the USD Index for guidance. Specifically, we'll need to see a break below 78.00 to persuade us the USD downtrend has become entrenched. In the lead up to the FOMC decision, we suspect a generally weaker USD will keep NZD/USD underpinned on dips towards 06280-0.6300. Initial resistance is eyed around 0.6455, but a break above this level will open up the topside towards 0.6500. Locally, keep an eye out for Westpac's quarterly consumer confidence survey, which is expected to nudge up to around 105-110 region. The USD weakened against most major currencies last night. It was a wild session that saw both EUR/USD and GBP/USD climb about 2½ cents. Early in the Asian session, rumours that China was considering rate cuts helped underpin global confidence. Currencies like EUR/USD surged higher and reduced "˜safe-haven' demand weighed on the USD. While China didn't end up cutting rates, firm to stable European and US equity markets helped underpin risk appetite. Concern about reserve diversification also played a hand in the USD weakness. Ratings agency Moody's said that a severe challenge to the USD's status as the primary reserve currency could threaten the US's triple-A credit rating. And the Russian government said it was working on new steps to help diversify its reserve investments. Against a generally weaker USD, EUR/USD surged dramatically from below 1.3850 to above 1.4100. The economic news out of the Eurozone was mixed. The ECB's uber-hawk Weber said he saw no need for further measures. While the Eurozone PMIs suggest activity fell in Q2, the pace of decline appears to be easing (manufacturing index fell from 40.7 to 40.4, while the services index fell from 44.8 to 44.5). Nonetheless, Eurozone GDP looks on track to fall at least 1%q/q in Q2. Even less positive, IFO cut its 2009 German GDP forecast to -6.3% (from -6%) and expects the economy to continue to contract at -0.3% in 2010. The focus in currency markets has now turned to the FOMC decision tomorrow (6:15am NZ time). The Fed is widely expected to leave rates and its quantitative easing program unchanged. However, investors will be looking to the statement for guidance on what the Fed thinks about the recent "green shoots" and when it's likely to start removing monetary policy stimulus. We think it's overly optimistic to expect rate hikes before year-end. While the Fed will likely acknowledge the recent signs of improvement, we suspect it will repeat that activity will remain weak for a while and reiterate that rates will stay "exceptionally low for an extended period of time." A Fed statement that eases concerns over higher rates by the year-end has the potential to weigh on the USD. However, the recent equity market wobble makes us wary and we're not convinced the USD is ready to take another step lower just yet. Any post-FOMC slide in the USD Index would need to break below the early June lows of 78.00 to convince us a slide lower in the USD is sustainable right now. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.