The RBNZ, in holding its Official Cash Rate (OCR) at 2.50% yesterday, effectively watered down its tightening bias. Indeed, the statement contained zero guidance on the future path of monetary policy, noting simply: "?it remains prudent to keep the OCR on hold at 2.50%."

More interesting for currency watchers was the lack of any obvious jawboning with respect to the high NZD.

Compared to some of the lambastings of the past, the statement's wording that the "recent appreciation of the NZD is reducing exporters' returns" came across as rather mild. Markets took it as a green light to keep buying the NZD. The NZD/AUD leapt from below 0.7700 to almost 0.7730. The NZD/USD climbed around � cent to above 0.8150, helped by a backpedalling USD.

Overnight, markets paused for breath after all the excitement of the FOMC meeting the previous day. Currencies tracked tight ranges. Still, the NZD/USD continued to grind higher as USD sentiment deteriorated further. From around 0.8170 at the start of the night, the NZD/USD now trades close to 0.8200.

It's worth noting, NZ-US interest rate differentials have widened this week, conferring 'fundamental' support on the NZD/USD. Sliding US interest rates (largely thanks to the FOMC) have seen NZ-US 3-year swap differentials rise from 226bps to 237bps over the week.

For today, we wouldn't be surprised to see profit-taking knock the NZD/USD a shade lower given the strong (1.95%) gains over the week. However, we expect positive momentum and negative USD sentiment will see the NZD/USD test October's 0.8245 high before too much longer.

At 10:45am today, Statistics NZ publishes December merchandise export and import data. These will provide further insight into Q4 GDP. We expect these signals to be positive - we are looking for December's merchandise exports to be $3,982m. We'll also be keeping an eye on today's Crown Financial Statements (due at 10am).

Majors

The USD continued to slide overnight in the wake of yesterday's shockingly dovish FOMC statement. Not only did further declines in US bond yields weigh on the USD, but gains in equity markets and risk appetite dented the "safe-haven" allure of the greenback.

US bond yields drifted 2-5bps lower through the overnight session as markets continued to digest the Fed's new pledge to keep interest rates "exceptionally low" until late 2014. Last night's US data certainly didn't provide any support for bond yields. While durable goods orders beat expectations, jobless claims, home sales, and leading indicators were all weaker than expected.

Meanwhile, equity markets revelled in the prospect of US interest rates staying lower for longer. Asian equity indices posted gains of 0.3-1.6% with European bourses carrying on the good cheer, climbing 1.5-1.9%.

It wasn't just the Fed underpinning equity markets and risk appetite though. Unconfirmed reports Greece's private lenders were willing to accept a coupon of below 4% on new Greek bonds bolstered hopes of agreement on the Greek PSI deal.

With the USD in retreat, the major currencies notched up modest gains of 0.3-0.6%. The EUR/USD climbed from 1.3100 to 1.3160 and the AUD/USD rose to 2� month highs above 1.0680. Meanwhile, the GBP appreciated but underperformed the other majors thanks to some terrible looking UK retailing data (CBI survey -22 vs. -6 expected).

Looking ahead, improved global growth sentiment, confidence on China's ability to avoid a hard landing, and a Fed that has signalled its intention keep policy extremely loose for longer, should all conspire against the USD in the short-term. We know the ECB is likely to unload a further dollop of stimulus in February when it unveils a second LTRO, but this is potentially being offset by the Fed's latest musings.

We feel the combination of the Fed news and position adjustments will see EUR/USD extend its near-term gains, but in this run up, perhaps not by much. We now target a cluster of late 2011 highs/lows between 1.3210 and 1.3245 as EUR shorts continue to be unwound. A break of this pivot level may need the push of a Greek PSI deal.

Fixed Interest

Overall, the NZ market's reaction to the US FOMC meeting and subsequent RBNZ meeting was relatively muted.

Following the RBNZ statement (little changed), and in sympathy with the fall in US bond yields following the dovish FOMC meeting, NZ swap yields declined slightly. Yields closed the day around 5 bps lower, but volume continues to be extremely thin and liquidity non-existent.

2-year swaps now yield 2.81%, and the market continues to price a slight (20%) chance of a 25bps rate cut in the year ahead. However, there was certainly no hint of rate cuts in the RBNZ statement. In the near-term we believe 2-year rates will continue to be range bound within the 2.65%-2.90%.

With the Australian market closed yesterday, the NZ bond market was very quiet. Yields closed virtually unchanged. Another small DMO tender of 100m was announced for today, via GBNZ21s. With the fall in swap yields yesterday, 10-year swap-bond spreads narrowed by around 5bps to 23bps. This should help support demand at today's auction. Also helping, is the fact NZ-US 10-year bond spreads have risen sharply in the past couple of sessions to 200bps, the top of recent ranges.

With relevance for future DMO bond issuance, P. M. Key said yesterday that, while slower global growth expectations are threatening to delay a return to fiscal surplus in New Zealand, the Government is still committed to achieving this by 2014/15. We will get precise numbers in the Budget Policy Statement on 16 Feb.

Overnight, US 10-year yields drifted off to yesterday's post-Fed lows around 1.94%. Peripheral European yields mostly narrowed their spreads to "safe haven" German bonds. General buoyant sentiment in Europe followed the Fed commitment to keep rates 'exceptionally low' through to at least the end of 2014. The mood was also bolstered by a successful Italian bond auction. It saw ?4.5 of 2014 notes auctioned at a 3.76% yield, down from 4.85% on Dec 28. Key to watch today will be the DMO bond auction at 2pm.