Opinion: Kiwi hits 58 USc as hopes for global recovery rise (Update 1)

By Danica Hampton Update 1: The NZ dollar began to climb against all major currencies at about 11:00 am on Friday, with NZD/USD almost reaching 0.5900 just before 1:00pm. At time of update 1 NZD/USD was 0.5882. Editor's note: NZD/USD was 0.5776 at time of publishing NZD/USD surged higher last night as a bevy of good news fuelled hopes the global economy is on the road to recovery. China's PMI rose to 52.4 in March, beating forecasts of 49.0 and signalling an expansion in manufacturing activity for the first time in six months. The G20 communiqué (which tripled the resources available to the IMF and took steps to improve regulation and oversight) also helped feed the more optimistic tone. In response, global equities powered higher "“ stocks in Asian and Europe rose 4-6% and the S&P500 is currently up 3.4%. The improving global outlook and strong gains across equities saw growth sensitive currencies like NZD climb against "˜safe-haven' currencies like USD. EUR/USD surged from below 1.3250 to above 1.3500 after the ECB rate cut 25bps to 1.250% (less than the 50bps cut markets expected) and this added to the generally weaker USD tone. Real-money accounts out of Japan have also shown a steady and persistent appetite for NZD over the past 24 hours. After falling below 0.5650 yesterday afternoon, NZD/USD climbed above 0.5800 last night. Consistent with the recent improvement in global sentiment, yesterday' ANZ commodity price index showed a 1%m/m in world prices for NZ commodities. This was the first monthly rise since July last year, but the index is still down nearly 40% from the peak seen mid last year. It's worth noting, the recent rebound in NZD/USD has not been matched by a widening of NZ-US interest rate spreads. As such, while improving global sentiment and risk appetite will likely NZD/USD extend its gains near-term, we're not convinced these gains will be sustained over coming weeks For today, strong gains in global equities and improving risk appetite should ensure dips are limited to the 0.5690-0.5700 region. We suspect bounces towards 0.5830 will attract sellers ahead of tonight's US non-farm payrolls release. The USD slipped against the major currencies last night as investors digested the mix of higher global equities, stronger than expected Chinese PMI and a surprisingly modest ECB interest rate cut. We saw further glimmers of good news about the global economy last night. China's PMI rose to 52.4 in March, beating forecasts of 49.0 and the 50 threshold that signals expansion for the first time since last September. With infrastructure investment remaining strong and manufacturing activity and bank lending continuing to expand, China's economy looks on track to recover this year. The G20 communiqué also helped feed the general feeling of well-being. While no new fiscal stimulus measures were announced, the G20 trebled the resources available to the IMF to US$750b and will create a Financial Stability Board (FSB) to provide greater, coordinated regulation and oversight. The G20 also pledged to "refrain from competitive devaluation of our currencies". Global stock markets were cheered by anticipation of a Chinese recovery and hopes the global economy is on the road to recovery. New guidelines on mark-to-market accounting rules, which could make some banks look more profitable on paper, may have also provided a bit of support for financial stocks. The FTSE rose 4.3%, the DAX rose 6% and the S&P500 is currently up 3.4%. The S&P500 has now climbed about 25% off the low reached on March 9. In currency markets, hopes that the global economy is on the road to recovery saw the USD weaken as investors trimmed "˜safe-haven' bets. Improving risk appetite and solid demand from real-money accounts out of Japan helped underpin JPY crosses. USD/JPY surged from around 98.80 to within a whisker of 100.00. EUR/USD stormed higher, from around 1.3250 to above 1.3500, after the ECB decision. The ECB cut interest rates just 25bps to 1.25%, surprising the market who had been expecting a 50bps cut. In the accompanying press conference, Trichet confirmed that Eurozone activity remained "very weak in 2009" and would likely remain "very subdued" for the remainder of the year. The ECB said it could cut interest rates further and it would discuss and decide on non-conventional measures next month.   ________________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.