By Mike Jones

It feels a bit like Groundhog Day. After negotiating its way through a choppy night, NZD/USD has again ended the night pretty much where it started, a smidge above 0.7000.

Yesterday’s electronic transactions data was a tad disappointing. February’s ECT slipped a seasonally adjusted 0.3%, following their 1.0% increase in January. While the data does question the current pulse of consumer spending, the effect on the NZD was minimal.

Rather, the NZD took its cues from offshore, in particular the sharply weaker GBP and EUR. While fears over Greece’s deficit have certainly eased, sovereign credit fears still loom large. Ratings agency Fitch fired a shot across the bows of the UK government, saying the UK’s credit profile had “deteriorated” and it was “uncomfortable” with the UK’s fiscal position. Portugal was also in the crosshairs, with Fitch suggesting a downgrade was likely if not enough was done to slash its deficit. Terrible UK trade data added to the mix such that GBP/USD and EUR/USD were eventually dragged below 1.5000 and 1.3600 respectively.

While losses in GBP and EUR dragged NZD/USD back towards 0.6970 early in the night, the NZD managed to skirt most of the weakness. Solid NZD demand from both real money and custodial accounts, combined with a late rally in commodity prices, helped NZD/USD recoup its losses. Reflecting the NZD’s outperformance, NZD/GBP and NZD/EUR soared back to near post-float and 2-year highs respectively.

For today’s Q4 Overseas Trade Indexes data, we’re picking a sizeable 8.3% rebound in the terms of trade, predicated on a 7.7% surge in export prices. Given the market is not quite as bullish (expectations are for a 2.2% terms of trade gain), such a result has the potential to be mildly NZD positive. Theres also a bunch of data due for release in Australia to keep an eye on, but the highlight for the NZD and AUD may well be Chinese trade data due around 3pm (NZT). Support on NZD/USD is seen on dips towards 0.6950. Initial resistance is eyed around 0.7080.

It was a bit of a mixed bag for currency markets overnight. While credit fears weighed on GBP and EUR, ‘commodity-linked’ currencies like AUD and CAD extended their recent gains.

Once again, GBP was in the spotlight for all the wrong reasons. The UK trade deficit widened to nearly £8.0b in January, the widest since August 2008. This was far worse than the £7.0b expected, and provided scant evidence of the much needed recovery in the UK external sector. Meanwhile, February RICS UK house price balance data showed the sharpest one-month fall since April 2008.

With the GBP already on the back foot, renewed fears the UK may lose its AAA rating didn’t help matters. Ratings agency Fitch said the credit profile of the UK had “deteriorated” and it was "uncomfortable with the fiscal adjustment path set out by UK authorities." As a result, GBP/USD slipped from around 1.5020 to nearly 1.4980.

Sovereign credit fears also weighed on EUR. Fitch hit the wires again suggesting Portugal may suffer a ratings downgrade if it doesn’t do enough to trim its fiscal deficit. EUR/USD fell below 1.3600 before finding support around 1.3540.

Reflecting investors’ more cautious mood, it was a night of consolidation across global equities markets. The FTSE was broadly flat, the DAX ticked up 0.2% and the S&P500 is currently up around 0.5%. Flattish equity markets and subdued risk appetite boosted the ‘safe-haven’ appeal of the JPY. Indeed, JPY crosses were sold across the board and USD/JPY slipped back below 90.00. The JPY also found support from talk of increased Japanese repatriation flows ahead of fiscal year-end (March 31).

Despite losses across EUR and GBP, commodity-linked currencies fared a little better. Having drifted lower initially, commodity prices rebounded strongly later in the night. Oil prices flirted with recent highs around US$82/barrel and gold surged back above $US1125/ounce. The likes of CAD and AUD may have also benefited from comments from IMF chief Strauss-Kahn that the Chinese Yuan is “very much undervalued” and changes could be seen in “the coming months”.

As yet, China has given no hints on the timing of the removal of the Yuan’s peg to the USD. We expect Yuan appreciation to resume from around mid-year, at a modest pace initially. Our forecasts imply USD/CNY will depreciate by around 5% to 6.50 by December 2010. The associated rebalancing of Chinese growth away from exports towards domestic demand should prove positive for NZD and AUD.

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