Opinion: Kiwi$ higher on market applause for Fed spend-up

By BNZ Currency Strategist Danica Hampton NZD/USD has traded choppily within a 0.5350-0.5600 range over the past 24 hours. Yesterday's RBNZ survey of businesses and economic forecasters showed the mean expectation for 2-year ahead inflation fell to 2.7% from 3.0%. However, the market paid little attention to the data. Steady selling of NZD notably from Japanese accounts saw NZD/USD slip below 0.5350. But the NZD/USD did a swift about-turn later in the night. The Fed announced a US$800b plan aimed at making it easier for consumers to obtain credit, which will including buying mortgage backed securities and launching a facility to support finance for student loans, credit card and car loans. Markets reacted enthusiastically, US equities surged, the USD was sold heavily and EUR/USD stormed higher from around 1.2800 to above 1.3050. Some real-money demand was noted for AUD out of Asian, which combined with the broadly weaker USD, saw NZD/USD surge up to nearly 0.5600. However, the lofty levels in the NZD/USD didn't last long. US equities markets failed to hang onto their gains. At one point the S&P500 was up 2%, but the index erased its gains and is currently down 1.85%. Market chatter about heavy month-end demand for USD (thanks to MSCI weighting adjustments and hedge rebalancing) also added to the downward pressure on NZD/USD. While the rebound in global confidence (thanks to the huge fiscal spending splurge) may linger for a little while yet, it is important to remember there is no quick-fix for the troubles pressuring the global economy. The deteriorating global backdrop, combined with the NZ recession and expectations of aggressive RBNZ rate cuts, should ensure bounces in NZD/USD are limited. For today, we suspect bounces towards 0.5500-0.5525 will attract sellers. On the downside, some support is eyed around 0.5375-0.5400, but a weak close from US equities could see deeper correction towards 0.5350. We saw a dramatic move lower in the USD last night as investors digested the latest round of fiscal stimulus packages. French President Sarkozy said the French government would announce a "quite massive" stimulus plan in the next 10 days. Sarkozy said the plan would help revive the car industry"¦ and strengthen the building sector. In addition, in a joint newspaper column, Sarkozy and German Finance Minister Merkel wrote an EU stimulus package equivalent to 1% of EU GDP would be a "good target". Across the Atlantic, the US Federal Reserve announced an US$800b package designed to make it easier for consumers to obtain credit. The Fed has allocated US$600b to buy debt and mortgage backed securities issued by mortgage agencies Fannie Mae, Freddie Mac and Ginnie Mae. In addition, it also launched a US$200b facility to support consumer finance, including student loans, credit card and car loans. The knee-jerk reaction to latest fiscal stimulus plans saw equity markets bounce and the USD sold heavily. EUR/USD spiked from around 1.2800 to above 1.3050, GBP/USD surged from 1.5000 to nearly 1.5400 and USD/JPY slipped from above 96.50 to nearly 95.00. At one point, the S&P500 was up about 2%, but coming after the past two days extraordinary recovery (where the index has climbed more than 15%) the index failed to hold onto its gains and is currently down 1.85%. As US equities retreated from the highs, so too did EUR/USD and GBP/USD. Market chatter suggesting adjustments to the MSCI country weightings and rebalancing flows would produce strong demand for USD at month-end added to the downward pressure on EUR/USD and GBP/USD. Some market commentators are suggesting these month-end flows may total as much as US$8.2b. It's worth noting, at the start of the year the USD accounted for 47% of the MSCI World Equity Index and now makes about 51%. In the near-term, expect currencies to continue to take their cues from global equities. EUR/USD is unlikely to break above its overnight high, unless we see a reversal in equities and the S&P500 break into positive territory. While the optimism about the latest fiscal splurge may linger for a little while yet "“ don't forget the fiscal spend-up needs to be financed somehow and won't change the fact that the global economy is headed for recession. * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.