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One of the more extraordinary developments in the renewed global optimism and positioning for a global recovery has been the surge of the NZD. In rising to a six month high of US$0.6125 earlier this week, the NZD has defied the fact that New Zealand is going through what is one of the longest recessions in the word, record low interest rates, a shockingly wide current account deficit and a fiscal position that suggests the Budget deficit will be a factor that will have the credit rating agencies considering whether a downgrade is necessary or not in the months ahead Highlighting the NZD performance is that fact that in recent times, it was below US$0.49 and near A$1.30 (now around A$1.26). The move has indeed been impressive.

In explaining the NZD momentum, the only possible explanation for its move is the market positioning for an early recovery. In other words, we could be seeing foreign exchange markets rewarding countries that have pro-growth/ high inflation policies in place. For that theory to work, there needs to be concrete evidence that the recovery is in fact gathering momentum. In the case of recent data, the evidence is very thin. To be sure, some of the confidence measures are less negative and there will be a significant monetary stimulus once the bulk of mortgages are refinanced late in 2009 and in 2010 which should free up consider cash flows and spark a pick up in growth.

These trends, for the moment, appear sufficiently distant to see the NZD correct lower as the global euphoria eases. It is worth noting that house prices are still falling, the terms of trade are still weak, retail sales are plummeting and as an
export dependant country, the external accounts are in a mess.

Perhaps the upcoming retail sales and trade data may supply some guidance, with the market also starting to put some weight on the Budget on 28 May as an indicator of the size of the twin deficit problem.