Having surged to three month highs above 0.8130 on Tuesday, the NZD/USD has spent the past 24 hours beating a volatile path lower.

Overnight, investors' risk appetite cooled, tempering demand for "growth-sensitive" currencies like the AUD, NZD, and CAD.

Not only are investors growing frustrated with the lack of agreement on the Greek PSI, but the IMF last night took an axe to their global growth forecasts (see Majors). In response, global equity markets notched up modest losses and our risk appetite index (which has a scale of 0-100%) eased from 56.7% to 55.0%.

While softening risk appetite weighed on the NZD/USD, solid demand for NZD/JPY and NZD/AUD provided some positive offset.

The NZD/JPY leapt from 62.50 to 2� month highs of nearly 63.00 amid heavy custodial selling of the JPY. Meanwhile, the NZD/AUD has ground up almost � cent over the past 24 hours.

We expect the NZD/AUD to continue to track gradually higher in coming weeks as the RBA cuts rates further and Australia's yield advantage over NZ is slowly eroded. However, we are cautious on the chances of substantial near-term gains in the absence of further improvement in NZD/AUD "fundamentals".

Indeed, the NZD/AUD is approaching the upper band of our short-term valuation model's "fair-value" range. The model (which is based on NZ-AU 3-year swap differentials, relative NZ-AU business confidence, and commodity prices) currently suggests a NZD/AUD "fair-value" range of 0.7550-0.7750.

Today's NZ credit card billings data are unlikely to ruffle the NZD. Expect to see continued hangover from the Rugby World Cup. Keep a close eye on this afternoon's Australian CPI figures though. A lowish read on underlying inflation is seen as critical for cementing another RBA rate cut next week (market expectations +0.2%q/q, trimmed mean +0.5%). Such a result would provide headwinds for the AUD, but likely underpin the NZD via a higher NZD/AUD.

Majors

Fading risk appetite and strong USD/JPY demand spurred a tentative recovery in the USD overnight.

Early in the night, further gains in the EUR kept the USD under pressure. Indeed, a robust set of European PMIs (50.4 vs. 48.5 expected) helped the EUR/USD climb to three week highs above 1.3050. We'll be watching tonight's IFO survey (107.6 expected) to see if recent signs of life in the German economy can be sustained.

It wasn't long before the EUR lost some of its lustre. Investors' previously buoyant risk appetite was tempered a little by news a Greek PSI deal had (still) not been reached, market chatter about a second bailout being needed for Portugal, and the IMF slashing its global growth forecasts from 4.5% to 3.9%.

Global equity markets dipped into the red (the S&P500 is currently down 0.3%) and the VIX index (a proxy for risk aversion) jumped from 18.6% to 20%. Rising "safe-haven" demand saw investors ditch the EUR in favour of the USD and the EUR/USD skidded back below 1.3000.

A scream higher in USD/JPY also underpinned the USD last night. It's temping to conclude the Bank of Japan's downgrade of its economic outlook and warnings about currency strength (will we get the same from the RBNZ tomorrow?) did the damage to the JPY. After all, the BoJ slashed its 2012 GDP forecast (year to March) from +0.4% to -0.3%. However, a large part of the surge in USD/JPY can be attributed to a large custodial buy order.

The GBP managed to overcome the broadly stronger USD thanks to a solid set of government borrowing figures. Public sector net borrowing fell to 'just' �13.7b in December, against market expectations of �14.7b.

Looking ahead, there is plenty of event risk to excite currency markets over the next 24 hours. Data wise, the German IFO, UK Q4 GDP, and the December Australian CPI will capture the most attention. However, it's likely tomorrow morning's (6:30am NZT) FOMC meeting and this afternoon's Obama State of the Union address (3pm) will be the focus.

This will be the first FOMC meeting in which member's interest rate expectations are shown, boosting the likelihood of a more violent than normal market reaction. An influx of new FOMC members with more dovish leanings also means markets are on the lookout for any hints the Fed is thinking about additional stimulus (QEIII). Any such hints would likely weigh on the USD and provide a boost for equity markets and risk appetite generally.

Fixed Interest

There was not a lot going on in NZ markets yesterday. Yields closed a little higher, with the swap curve slightly steeper. The yield on 2-year swaps lingers at 2.82%, while 10-year yields have risen to 4.08%.

Bond yields rose around 2bps across the curve, taking the yield on 21s to 3.91%. The yield on inflation-linked NZGB16s appears to be stabilising around 1.20%. This comes after its step jump up from 1.00% on last week's low-side inflation surprise.

Overnight, markets were relatively subdued as negotiations in the Greek bond restructuring stalled. US 10-year yields are still bumping up against the top of their recent range, now around 2.06%. The yield on German equivalents is flirting with breaking above 2.0%.

In a surprise move, the Indian central bank cut the cash reserve ratio for banks by 0.5% to 5.5%. This illustrates that emerging markets stand ready to buffer themselves from the ill-effects of the European crisis, if necessary. Up until October last year, India had still been raising its main policy rate to head-off inflationary pressures.

Today, Australian CPI data will give some colour on its inflation picture. The market expects a downshift from 0.6%q/q to 0.2%q/q. This will still keep the y/y rate at 3.3%.

Early tomorrow morning the US FOMC will announce rates. This will be closely watched for the committee's new communication mechanism. Given the market expects little tightening before 2014 it will be hard for the Fed to surprise on the downside with respect to its expected interest rate track. However, the Fed will likely still talk about considering more asset purchases "if necessary".

NZ credit card billings, as the only local data today, are unlikely to greatly impact the local market.