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Opinion: Kiwi back up after Bollard-led fall (Update 1)

Opinion: Kiwi back up after Bollard-led fall (Update 1)

Danica Hampton By Danica Hampton Editor's note: NZD/USD was back up to as high as 0.5691 this morning (0.5668 at time of update 1) after opening the New Zealand trading day at around 0.5620. The RBNZ caused a bit of stir in NZ financial markets yesterday by releasing an unscheduled press statement. In its March MPS, the RBNZ highlighted that further cuts in the OCR were likely. Yesterday Bollard warned the recent strength in long -term wholesale interest rates was "unwarranted and inconsistent" with the monetary policy outlook presented in March. Not only did yesterday's RBNZ statement remind investors that further interest rate cuts were likely in NZ (our forecasts have the OCR troughing at 2.00% by mid year), but it also served as a bit of reminder that the RBNZ was prepared to do something (even if its just jaw-boning) if financial conditions don't pan out in line with its expectations. In reaction, both the NZD and NZ interest rates fell heavily. NZ 2-year swap rates fell about 25bps to 3.69% and the NZD/USD dropped from 0.5700 to around 0.5550. Over the past 24 hours, NZD selling has been noted from a wide range of short-term speculative players as well as more macro-driven accounts. Steady interest to NZD against AUD has also persisted "“ investors are increasingly convinced the RBA will pause at its next meeting, which contrasts with expectations for further RBNZ rate cuts. NZD/AUD has slipped from above 0.8250 to below 0.8100 over the past two days. We suspect NZD/AUD will head back towards 0.8000 near-term, but don't think the argument for a dramatic move below 0.8000 are compelling. After dropping sharply yesterday, the NZD/USD stabilised a little last night. The global economic news was mixed and global equities chalked up modest gains, but most investors are content to sit on the sidelines and wait for the outcome of tonight's G20 and ECB meeting. For today, we suspect NZD/USD will struggle above 0.5700. On the downside, solid support is seen around the 0.5540-0.5550 region. The USD held steady against most of the major currencies last night. The economic news was a little mixed and global equities posted modest gains, but investors were reluctant to sell USD ahead of the release of the G20 communiqué. Last night's US data was mixed. The manufacturing ISM printed more or less in line with expectations, rising to 36.3 in March vs. 36.0 forecast. Construction spending (-0.9%m/m vs. -1.9% forecast) and pending home sales (2.1%m/m vs. 0.0% forecast) surprised on the upside. However, jobs data was disappointing. The ADP employment index dropped 742,000 in March, worse than the 663,000 forecast, which suggests some downside risks to Friday's non-farm payrolls. Despite the mixed economic news, global equities made modest gains. The FTSE rose 0.75%, the DAX rose 1.1% and the S&P500 is currently up 1.5%. March was a very strong month for global equities. The S&P500 recorded its best month since October 2002 and the index is up nearly 20% from the 12-year low hit on March 9. There is a lot of event risk over the next couple of days and it's unlikely to result in fresh reasons to sell the USD. The EUR has been one of the big beneficiaries of USD weakness over recent weeks. However, a string of weak Eurozone data and comments from ECB officials suggesting that quantitative easing shouldn't be ruled out has seen EUR/USD lose a bit of its lustre. Last night's soft Eurozone manufacturing PMIs and weak German retail sales certainly painted a weak picture on the outlook for Eurozone growth. The ECB is widely expected to cut rates 50bps to 1.00% tonight and the accompanying press conference will be closely eyed for the ECB's view on non-conventional policy measures. Any hint that Trichet is warming to the notion of non-conventional measures, in combination with continued weak data will keep the downward pressure on EUR/USD. Key support is seen around 1.3110-1.3120. The other key event is the G20. Market participants expect the communiqué to provide additional IMF funding, agree on anti-protectionist measures and sort out some regulatory issues (around risk, hedge funds and bank secrecy etc). However, markets are not expecting further announcements on additional fiscal stimulus measures. While the communiqué may not make any specific reference, comments from various officials over recent days have made it clear that the USD will remain the world's dominant reserve currency.   ________________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.    

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