BNZ Daily FX Wrap & Strategy - 10 Feb 09

BNZ Daily FX Wrap & Strategy - 10 Feb 09

NZD

Improving risk appetite saw NZD/USD surge dramatically higher last night, from around 0.5250 to nearly 0.5450.

Investors appear to have shrugged off the delay in passing Obama's US$827b fiscal stimulus package and receiving details over the new US bank bailout plan. Instead investors seem to be focusing on the positive impact the new measures should have on the beleaguered financial system and the outlook for global growth.

In currency markets, improving risk appetite has seen investors pare back "safe-haven" positions in USD. Against a generally weaker USD, high-yielding currencies like NZD have benefited the most. In terms of flows, model and momentum driven funds have shown a strong appetite to buy NZD over the past few days. Indeed, last night's break above 0.5374 stopped our momentum model out of its short NZD/USD position. However, longer-term real money accounts are still tending to be sellers

While currency markets are currently in a euphoric state, it's difficult to point to anything fundamental that has changed. For the optimism to continue, we really need to see the recent currency moves backed up by continued positive gains in global equity markets and evidence that cash and credit markets are starting to function more normally. In this regard, it's worth noting, US and European equity indices climbed little more than 0.5% last night.

For today, we expect dips to be limited to the 0.5300 region. While some headwinds are expected around 0.5450, a push up towards 0.5500-0.5550 looks likely in coming sessions if risk appetite remains buoyant.

Majors
The USD slipped against all the major currencies last night as investors adopted an optimistic mindset, hopeful that new government measures to shore up the financial sector will help ease the global recession.

Treasury Secretary Geithner has delayed announcing details of Obama's bank bailout plan until after the Congress has settled its differences over the economic stimulus plan. The final vote on the US$827b stimulus plan is expected on Tuesday. Investors appear to have shrugged off the delay in the US bank bailout plan and instead seem to be focusing on the positive impact the new measures should have on the troubled financial sector.

Across the Atlantic, the ECB is also investigating new ways to shore up the financial system. Draft guidelines to be discussed at the upcoming European Finance Ministers meeting, reveal the ECB recommends combining government guarantees with a "bad bank" in order to rid lenders of toxic assets.

In currency markets, improving risk appetite has seen investors pare back "safe-haven" positions in USD. On a trade weighted basis, the USD has fallen about 1% over the past 24 hours and EUR/USD has stormed higher, from below 1.2900 to nearly 1.3100. However, high-yielding, growth sensitive currencies like NZD and AUD benefited the most from the return in risk appetite. Over the past 24 hours, NZD/USD has risen 3% and AUD/USD has climbed about 2%.

Despite the euphoria evident in currency markets, equity markets were much more muted overnight. European and US bourses are up by little more than 0.5%.

It's also worth noting, yields on US government bonds rose to levels not seen since November last night (above 3.00% in the 10-year and above 3.75% in the 30-year). With US Treasury borrowing expected to reach an unprecedented US$2t this year, the prospect of absorbing all that supply is clearly taking a toll on debt prices. In light of the recent USD weakness, it does raise questions as to whether investors are starting to become more reluctant to hold USD denominated assets.

For the coming week, risk appetite and the performance of global equities will likely continue to be the key driver of currencies. There are several corporate earnings reports and some key US data towards the end of the week, but the Senate's vote on Obama's stimulus bill and the unveiling of US Treasury's new bank bailout plan will likely overshadow everything else.

While currency markets are currently in a euphoric state, it all seems to be a bit of a house of cards that could tumble at any point. For the optimism to continue, we really need to see the recent currency moves backed up by continued positive gains in global equity markets and evidence that cash and credit markets are starting to function more normally.

For other Bank of New Zealand research, such as the Markets Outlook and the Economy Watch, please go to www.bnzmarkets.co.nz.

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