Opinion: Kiwi performs strongly, hits fresh 1-month high

Opinion: Kiwi performs strongly, hits fresh 1-month high

Danica HamptonBy Danica Hampton The NZD has been one of the strongest performing currencies over the past 24 hours. It has climbed about 1.9% against the USD and more than 1% on a trade weighted basis. The NZD has benefited from the continued recovery in global equities and risk appetite. Strong gains in financial stocks continue to underpin global equities. Barclays said 2009 had gotten off to a "strong start", echoing the sentiment expressed by Citigroup, JP Morgan and Bank of America last week. Media reports suggesting the Bank of Japan is considering buying subordinated bank debt added to the positive tone. The S&P500 is currently up 1.5%. Against a backdrop of firmer global equities and improving risk appetite, investors have trimmed "˜safe-haven' currency positions. This has tended to result in a generally weaker USD and solid demand for JPY crosses like NZD/JPY. Macro accounts and momentum-driven funds have been active buyers of NZD. Over the past 24 hours, NZD/JPY has climbed from below 51.00 to around 52.50 and NZD/USD has risen to a fresh 1-month high of nearly 0.5350.

Investors have largely ignored the local news. Yesterday's manufacturing data for Q4 was dreadful "“ sales volumes dropped 5.4%q/q and we estimate that manufacturing production fell about 4% over the quarter. As a result, we've downwardly revised our GDP pick to -1.1% from -0.6%. This will be well below the -0.8% forecast by the RBNZ in its March MPS and we remain comfortable with our view of the OCR troughing around 2.00% by mid year. For today, the backdrop of recovering global equities and improving risk appetite should keep dips limited to the dips will likely be limited to 0.52005-0.5225. On the topside, initial headwinds are expected ahead of 0.5350, but a push towards 0.5400 is possible near-term if equities and risk appetite continue to recover. The rivers are still flowing with chocolate"¦ global equities have extended their gains and risk appetite continues to recover. In currency markets, the trimming of "˜safe-haven' positions has tended to result in a generally weaker USD and demand for JPY crosses. Global equities climbed last night, once again bolstered by strong gains in financial stocks. Banking stocks got a lift after Barclays said it had a "strong start" to 2009, echoing last week's comments from Bank of America, Citigroup and JP Morgan. News that the Bank of Japan is considering buying subordinated bank debt probably added to the positive tone. The Nikkei rose 1.78%, the FTSE climbed 2.0%, the DAX rose 2.3% and the S&P500 is currently up 1.5%. The backdrop of improving risk appetite and stronger equities has encouraged investors to trim "˜safe-haven' currency bets in the USD. Against a generally weaker USD, EUR/USD climbed to a five week high of nearly 1.3075 last night. At the margin, elevated Eurozone inflation data probably helped EUR sentiment. Annual Eurozone CPI rose to 1.7%y/y in February, slightly above forecasts for 1.6%. At the margin, a US Treasury report showing a net capital outflow of US$43b from the US in January may have added to the weight on the USD. Foreigners sold a net US$18.8b of US securities, while US investors put US$24.2b into foreign assets. With the US trade deficit widening, falling capital investment raises concerns over how the US will finance its current account deficit. While not a big focus for the market, last night's economic data was uninspiring. The New York Fed's manufacturing index fell to another record low of -38.23 in February, while industrial production slipped 1.4% in February (vs. forecasts for -1.3%). In a taped TV interview, Fed Chairman Bernanke warned the recession could last most of the year. The big question for the coming week is whether or not the recent rebound in risk appetite and equity markets will be sustained. Since the lows reached in early March, the S&P500 has risen more than 16% and the MSCI World Equity Index is up about 12%. Over the past week, our risk appetite index has climbed about 5% and is currently sitting around 20% (although still well below the long-term average of 50%). Should global equities continue to recover, we'd expect the trimming back of "˜safe-haven' positions to keep the USD weak and JPY crosses underpinned. * 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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