By Mike Jones

NZD

The NZD remains the darling of currency markets. Indeed, the kiwi was the strongest performing G10 currency overnight, for the third day running.

The NZD/USD essentially chopped sideways in a narrow 0.7920-0.7970 range for most of the night. However, this was a remarkably resilient performance given the headwinds posed by rising European debt jitters and a broad-based strengthening in the USD.

Ratings agency Fitch mentioned the words "cataclysmic" and "euro" in the same breath, scuttling investors’ risk appetite and spurring "safe-haven" demand for the USD. Our risk appetite index (which has a scale of 0-100%) dipped 2 percentage points to 48%.

Still, solid speculative and real money demand for NZD/AUD and NZD/EUR helped prop up the normally risk sensitive NZD. NZD/EUR climbed to a new high of around 0.6260 while NZD/AUD squeezed up to a 2½ month high of almost 0.7730 after poking its nose above the technically important 100-day moving average at 0.7715.

Looking ahead, we think the NZD/AUD will remain on a slow and steady uptrend for most of this year. However, in the near-term, we’d be cautious about chasing the currency above 0.7750. Our short-term NZD/AUD valuation model currently suggests a “fair-value” range in the NZD/AUD of 0.7500-0.7700.

Today at 1pm (NZT) we receive the December update on the ANZ commodity price index. We doubt the release will offer anything in the way of a NZD boost, with some further down-drift in NZ export prices expected.

The more important influence on the NZD on the day will likely be Chinese PPI and CPI figures due out around 2:30pm. A weaker-than-expected set of numbers (current expectations: 1.7%y/y for PPI and 4.0%y/y for CPI), would likely strengthen the case for Chinese policy stimulus, underpinning the NZD and AUD.

Majors

Investors’ New Year optimism began to fade overnight. A resurfacing of European debt and economic worries saw investors take flight from risk sensitive assets and the EUR. As a result, the “safe-haven” USD strengthened across the board.

Soothing comments from German and Italian policy makers, and robust demand at Germany’s 5-year €4b bond auction, did little to improve the mood. Instead, traders focused on a report from ratings agency Fitch suggesting the ECB needs to do more to prevent a "cataclysmic" collapse of euro.

Fitch also said Greece "has the potential to plunge the euro zone into crisis." News the German economy went backwards in Q4 simply underscored the dour euro area economic outlook. Finally, data showing overnight deposits at the ECB hit an all-time high of €486b revealed European banks are still reticent to lend to each other.

The return of European debt worries rattled investors’ previously robust risk appetite. European and US stock indices slipped 0.2-0.5% and the VIX index (a proxy for risk aversion) rose from 20.50 to around 21.20. Most commodity prices recorded small falls, with the exception of a 0.7% rally in gold prices.

Renewed demand for "safe-haven" assets underpinned not only gold prices, but also US Treasuries and the USD. Two and ten year US bond yields slipped 2 and 7 bps respectively. Chicago Fed President Evans provided an additional drag on US bond yields, saying the "painstakingly slow" US recovery means the Fed should stick with its super accommodative policy stance for now.

Against the broader stronger USD, the European currencies again underperformed. The EUR/USD skidded from 1.2780 to almost 1.2680 while the GBP/USD shed almost 1 ½ cents, in part thanks to some disappointing UK trade data. The UK visible trade balance widened to £8.6m in November, from a revised £7.9m in October (£8.4m expected).

Looking ahead, near-term direction for the EUR will come from tonight’s ECB monetary policy decision. The Bank of England also takes the stage. No change in cash rates or unconventional policies is expected from either bank. The more interesting question is whether ECB chief Draghi will signal that 1% is the floor for eurozone rates as it was under Trichet. We expect any further ECB easing to be delayed until March.

Near-term support on the USD index is eyed towards 80.70 with initial resistance seen around the overnight high of 81.50.

All its research is available here.