Opinion: Why the Kiwi could head towards 60 USc this week

By Danica Hampton After falling below 0.5550 on Wednesday, the NZD/USD climbed to within a whisker of 0.5900 on Friday. Much of the recent NZD strength is attributable to an improvement in sentiment toward the global economy. Investors have become hopeful that the dramatic policy measures taken worldwide will help shore up the global economy. Last week's G20 communiqué and a string of slightly better than expected UK data helped this general feeling of well-being. In response, global equities have staged a strong recovery. The S&P500 climbed 3.4% last week and is now 25% above the lows seen in early March. The improving global outlook and strong gains across equities has seen growth sensitive currencies like NZD climb against "˜safe-haven' currencies like USD. Real-money accounts out of Japan have also shown a steady and persistent appetite for NZD. But it hasn't just been a global story. The NZD has also benefited from a general sense that the NZ economy will come out of the global recession in relatively good shape. Q4 GDP wasn't quite as bad as expected and last week's data suggests the housing market may be stabilising. NZ commodity prices are also showing signs of recovery. The average dairy price at Fonterra's online auction has climbed for two consecutive months and the global price of NZ's export bundle (as measured by the ANZ Commodity Index) climbed 1%m/m in March. Rising NZ interest rates (amid growing conviction the RBNZ is approaching the end of its easing cycle and heavy paying in the swap market from domestic mortgage books) has also helped support the NZD. Since the March MPS, NZ 3-year swap rates have risen about 90bps to 4.50% and NZ-US 3-year swap rates have widened about 80bps to 2.60%. The improving NZ fundamentals suggest the recent rebound in NZD/USD has a greater chance of being sustained. The fortunes of the NZD this week will depend greatly on whether or not the global equity markets continue to recover. If investor sentiment remains buoyant, a generally weaker USD and demand for JPY crosses could see NZD/USD head towards 0.6000. However, we are mindful that investor confidence is fragile and should equity markets start to slide, NZD will come under selling pressure again. However, solid support is expected on dips towards 0.5550. Locally, the key event will be Tuesday's Quarterly Survey of Business Opinion (QSBO). The last QSBO was the worst on record and so Tuesday's update may struggle to reach new lows. Nonetheless, a substantial rebound is not expected. The USD slipped slightly against the major currencies on Friday night, as global equities eked out small gains and US non-farm payrolls met expectations. EUR/USD traded within a 1.3350-1.3500 range and USD/JPY climbed from around 99.50 to nearly 100.40. The US non-farm payrolls report showed that 663,000 jobs were lost in March and the unemployment rate leapt to a 25-year high of 8.5% (in line with market expectations). More than 5 million Americans have lost their jobs since the US economy went into recession in December 2007; about two thirds of these jobs have been lost in the past two months. In a separate report, the non-manufacturing ISM fell to 40.8%, well below forecasts for 42.00. This suggests the US services sector has been contracting for six consecutive months. Despite the lacklustre US data, investors were encouraged by comments from Fed Chairman Bernanke, who said the Fed would use all tools available in order to stabilise markets and set the stage for an economic recovery. US equity markets managed to shrug off the dismal news and eke out modest gains. The S&P500 rose 0.97% on Friday night and finished the week 3.3% higher "“ the fourth consecutive weekly gain. The S&P500 has now climbed about 25% off the low reached on March 9. There is little on the US data calendar this week; the highlights will be the FOMC Minutes on Wednesday and International Trade data on Thursday. But there is a bit more happening in the Eurozone - PPI, Q4 GDP and German industrial production the highlight. The Bank of England meets this week, but is widely expected to keep the policy rate unchanged at 0.50% and its unlikely to alter its quantitative easing program. The fortunes of currencies this week will depend greatly on whether or not the global equity market recovery continues. Should investor sentiment remain buoyant, improving risk appetite will likely continue to weigh on the USD and boost demand for JPY crosses like EUR/JPY. However, we're also mindful that should the upcoming Eurozone data disappoint and investors become concerned European policy markets aren't doing enough to promote economic growth this may see EUR/USD struggle to push higher. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.