Opinion: Kiwi jumps above 64 USc after RBNZ keeps OCR on hold
12th Jun 09, 9:06am
By Danica Hampton NZD/USD has pushed higher over the past 24 hours, from around 0.6250 yesterday morning to above 0.6450 last night. The RBNZ left rates unchanged at 2.50% yesterday. The accompanying statement made it clear the "OCR could still move modestly lower over coming quarters" and that rates would remain "at or below the current level through until the latter part of 2010". But it wasn't enough to stop market participants from being convinced the central bank has done its dash with regards to interest rate cuts. NZ 2-year swap rates bounced more than 20bps to 3.85% and NZD/USD climbed from around 0.6250 to nearly 0.6350. Overnight, the NZD/USD extended its gains, climbing above 0.6450. A modest rebound across global equites encouraged risk appetite and reduced "˜safe-haven' demand tended to undermine the USD. Meantime, a modest drop in US bond yields (2-year yields fell 3bps to 1.30% and 10-year yields fell 8bps to 3.86%) also helped dent the yield appeal of the USD. While custodial names have been noted selling NZD over recent days, these flows have been more than overshadowed by short-term speculative players and the USD weakness. We've been talking about a short-term USD recovery for about a week now, but last night's USD weakness has investors questioning whether the anticipated USD recovery is already over. We think the key level to watch is 79.00 in the USD Index (which equates to around 1.4200 in EUR/USD). A break below 79.00 will mean a re-test of last week's 78.00 low is imminent, which ultimately will see NZD/USD push back towards 0.6550-0.6600. On the other hand, if the USD Index fails to break below 79.00 this will suggest the USD is still in recovery mode and NZD/USD will struggle to push above the 0.6475-0.6500 region. For today, in the absence of a break lower in the USD Index, we look for NZD/USD to trade a 0.6375-0.6500 range. The USD weakened against all the major currencies last night, as global equities chalked up modest gains and US bond yields slipped lower. Modest gains across global equites encouraged risk appetite and reduced "˜safe-haven' demand tended to undermine the USD. A modest drop in US bond yields (2-year yields fell 3bps to 1.30% and 10-year yields fell 8bps to 3.86%) also helped dent the yield appeal of the USD. EUR/USD surged from around 1.3950 to above 1.4150, GBP/USD rose from sub-1.6400 to above 1.6600 and the USD Index fell more than 1% from 80.40 to around 79.20. It's interesting to note, last night's USD weakness came despite upbeat US data and a flattening of the US yield curve (which all else equal would normally have supported the USD). Retail sales rose 0.5%m/m in May, the first gain in three months. A separate report showed the number of US workers filing for unemployment claims fell 24,000 to 601,000 in the week ending June 6 (the lowest weekly claims since mid January). All in all, the US data provides further evidence the US may be turning the corner. US bond yields fell last night following solid demand at the 30-year government bond auction. With 10-year yields rising to an 8-month high following yesterday's 10-year bond auction, there was some concern about how the 30-year auction would go. However, the 30-year auction elicited a bid-to-cover ratio of 2.68 "“ its highest since May 2008 "“ and indirect bidders (usually considered a proxy for offshore demand) took home 49% of the bonds on offer. The solid 30-year auction results helped alleviate some of the concerns over the cost of financing the US fiscal deficit and assuage fears about souring offshore demand for longer dated USD denominated debt. 30-year bond yields fell 7bps to 4.69% and the yield curve flattened (10-2 yield spread fell 5bps to 2.54%). As regular readers will know, we've been talking about a short-term USD recovery for about a week now, but last night's USD weakness puts markets at a key crossroad and it's hard to know whether or not the USD is about to embark on another bout of USD weakness. We think the key level to watch is 79.00 in the USD Index (which equates to around 1.4200 in EUR/USD). A break below 79.00 will mean a re-test of last week's 78.00 low is imminent, which ultimately will see other currencies like NZD/USD and AUD/USD pusher higher.