By Mike Jones

The NZD/USD has spent most of the past 24 hours consolidating in a 0.7120-0.7170 range.

The key theme in currency markets overnight was US dollar strength. Fresh concerns about how Greece will fund its expanding deficit prompted renewed demand for ‘safe-haven’ assets, supporting the USD and JPY.

The Greek PM admitted high funding costs are making cutting Greece’s deficit difficult. Meanwhile, another Greek official suggested Greece may apply for aid from the IMF as early as the Easter weekend. EUR/USD slipped to 1.3620 and GBP/USD fell back to around 1.5260.

Still, NZD/USD managed to buck the firming USD trend. Solid demand for NZD/USD from both macro and leveraged accounts, combined with further recovery in NZD/AUD, ensured NZD/USD dips were limited to around 0.7120. NZD/EUR reached a fresh 2-year high above 0.5250. Our NZD/EUR forecast of 0.5300 for June is now looking a little light.

It seems markets have come around to our view that a NZD/AUD below 0.7700 is unjustified on the basis on NZ’s economic fundamentals. We are picking annual average GDP growth for NZ of 3.1% for calendar 2010 and 3.5% for 2011. While hardly awe inspiring, such an outcome would see Australia’s growth advantage largely eroded by year end, from over 2 percentage points currently. If AU-NZ growth differentials narrow as we expect, NZD/AUD should continue to trend higher in coming months. But it is expected to be slow going. Indeed, our forecasts do not have NZD/AUD above 0.8000 until the second half of this year.

Today’s report on International Travel and Migration will probably affirm another reasonable number on net immigration during February. In the short-term, NZD/USD dips are expected to be limited to 0.7100, with a push towards 0.7250 now looking likely in coming days.

The USD strengthened against most of the major currencies last night, as a tempering of recent optimism about Greece’s debt crisis prompted increased demand for ‘safe-haven’ assets.

With concerns over Greece’s funding plans returning to the fore, it wasn’t surprising to see EUR bear most of the brunt of the stronger USD last night. Indeed, EUR/USD tumbled from around 1.3740 to nearly 1.3600. Not only did the Greek PM say Greece’s high borrowing costs means it “cannot sustain the deficit reduction”, but a Greek official said Greece may ask the IMF for support over the Easter weekend. The Greek PM blasted these reports as "ridiculous", but this seemed to have little effect on sentiment.

Amplifying pressure on EUR, comments from the Swiss National Bank that consumers should “prepare for higher rates” saw EUR/CHF slide from 1.4460 to 1.4420. Sharp declines in EUR dragged most of the major currencies lower last night as ‘safe-haven’ demand for the USD and JPY returned. Reflecting the more cautious sentiment, global equity markets paused for breath after decent gains earlier in the week. The DAX and FTSE rose 0.2% and 0.04% respectively and the S&P500 is currently down 0.2%. For the most part, last night’s swathe of US data (CPI, jobless claims, current account and the Philadelphia Fed index) all printed relatively close to analyst expectations.

UK public sector borrowing in February, while still massive, was lower than expected (£12.4b vs. £14.0b). Our UK economists reckon this means the UK Chancellor will revise down UK borrowing projections in next week’s Budget. In reaction to the news, GBP/USD jumped from 1.5270 to above 1.5320, before later succumbing to the firming USD and dribbling lower. Still, EUR/GBP fell below 0.8950, down over 2% from Monday’s highs above 0.9100.

In a further sign it is preparing to revalue the Yuan, China revealed it is conducting ‘stress tests’ on 12 industries to see how they would cope with a stronger currency. Pressure from the US is showing no signs of abating – the US Ambassador to China said “we hope to see more flexibility on the exchange rate”. Yuan forwards ticked up to 6.66 yesterday – implying a 2.4% Yuan appreciation from the current spot rate.

For today, renewed concerns over Greece’s funding difficulties are expected to limit bounces in EUR/USD to the 1.3730 region. We suspect it will take signs of clear strength in next week’s European manufacturing data or the German IFO to see EUR/USD break through key resistance towards 1.3780/90. Near-term support is eyed towards 1.3600.

* Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here