By Danica Hampton NZD/USD has climbed over the past 24 hours, from around 0.5750 yesterday afternoon to above 0.5850 last night. Investors shrugged off their concerns about the US bank stress testing and instead chose to focus on the good news. The global economic data wasn't quite as bad as feared. The ADP report showed that US jobs fell "just 491,000" in April and the services PMIs in both the UK and Eurozone surpassed expectations. Optimism on the global growth outlook and strong gains across equities (the S&P500 is currently up 1.7%) saw growth sensitive currencies like NZD strengthen, particularly against "˜safe-haven' currencies like USD and JPY. Solid demand for AUD/USD (after yesterday's stronger than expected retail sales and trade data) from macro-driven funds also provided a bit of support for NZD/USD. While we've seen some glimmers of hope on the global front, we don't think there is a compelling fundamental reason to chase NZD/USD higher from here. The "˜fair value' range for NZD/USD (according to our short-term valuation model) is currently 0.5400-0.5600. This is significantly below the 0.5700-0.5900 range seen a month ago, as a marked narrowing of NZ-US interest rate spreads has more than offset the rebound in NZ commodity prices and risk appetite.
Today's Q1 Household Labour Force Survey is unlikely to inspire much confidence in the NZ economy. Everyone, including ourselves, expects a clear jump in the jobless rate - to 5.3% from Q4's 4.7% (with a quarterly employment decline of about 1.0%). What's more, the unemployment rate looks likely to head up towards 7.0% in 2010. While the NZD/USD looks too high relative to economic fundamentals, the near-term direction will depend on global sentiment. For today, the global backdrop of firm US equities and recovering risk appetite should keep NZD/USD underpinned on dips towards 0.5790-0.5800. Initial resistance is seen in the 0.5870-0.5880 region. The USD slipped against most of the major currencies last night as risk appetite improved and US equities rebounded. However, worries about tonight's ECB decision and ratings downgrades to several German banks tempered the selling pressure in USD. Hopes the global economy is on the road to recovery and reduced "˜safe haven' demand has tended to result in a weaker USD over recent days. Last night's economic data wasn't quite as bad as feared and this helped support the global optimism. In the US, the ADP employment report shed just 491,000 jobs (well above the 650,000 decline forecast by economists). Across the Atlantic, the UK services PMI rose to 48.7 in April (well above the 46.3 forecast) and the Eurozone composite PMI rose to 41.4 (vs. 40.5 forecast). Global equities also recorded strong gains. Financial stocks rebounded as investors speculate that US banks are in decent shape; even if the Fed's stress testing suggests banks need to raise more capital. For example, Bank of America shares rose about 17% despite reports the bank may need to raise up to US$33.9b of additional capital. The DAX rose 0.6%, the FTSE rose 1.4% and the S&P500 is currently up 1.7%. Despite the improving global sentiment, EUR/USD was confined to a 1.3250-1.3375 range last night. Not only did Standard & Poor's cut the credit ratings on all six German Landesbanks, but investors remain cautious ahead of tonight's ECB meeting. We expect ECB President Trichet to cut rates 25bps to 1.00% and formerly lay out non-conventional easing measures. The ECB will likely extend the maturity of its liquidity measures (from its current 6 months to 9 or 12 months) and announce that it's prepared to buy corporate paper or commercial loans. However, we do not expect an announcement to buy government debt at this stage. The Bank of England (BoE) also meets tonight and will almost certainly leave interest rates at 0.5%. The bigger question is whether or not the central bank will extend its quantitative easing program. The BoE is currently about two-thirds of the way through their intended £75b worth of asset purchases with a month to go. With the impact of quantitative easing still very hard to read, and tentative signs of a recovery in some of the economic data, we suspect the BoE will also leave its quantitative easing program unchanged tonight. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.