NZ$ buoyant towards 70 USc on global risk appetite, Winston Reid's goal

By Mike Jones

The NZD has spent the past 24 hours consolidating in a 0.6890-0.6990 range. The NZD was pretty much off the radar for markets overnight. Rather than watching currency screens, it seems most market participants were much more interested in tuning into the All Whites flying 1-1 start to their Football World Cup campaign.

Nevertheless, further recovery in equity markets and risk appetite kept the NZD well underpinned. Indeed, global markets spent the night in a generally positive frame of mind, as several successful European bond auctions kept European sovereign debt fears at bay.

Auctions held by Ireland, Spain and Belgium raised a total of €9.2b in funding. Equity markets posted gains of 0.3-2.5% and oil prices surged 2.3% as concerns over the strength of global demand continued to abate.

Indicative of markets’ rose-tinted view of the world, a downright terrible reading of the German ZEW economic sentiment survey (28.7 vs. 42.0 expected) was largely shrugged off. Instead, buoyant equity markets provided all the impetus markets needed to trim exposures in ‘safe-haven’ assets and invest in ‘growth-sensitive’ currencies.

EUR/USD climbed to a three week high of nearly 1.2350, and NZD/USD was dragged up to around 0.6980 on its coattails.

Global equity market sentiment is the major driver of the NZD at present. As such, should Asian equity markets carry on the positive lead from US and Europe, we wouldn’t rule out a retest of 0.7000 for NZD/USD today.

This is certainly the risk suggested by our short-term NZD/USD valuation model. The model suggests the current combination of NZ commodity prices, NZ-US 3-year swap spreads, global growth expectations, and risk appetite is consistent with a short-term “fair-value” range of 0.7150-0.7350 in NZD/USD. For today, solid support is eyed towards 0.6900.

Majors

The USD weakened against all of the major currencies overnight. On a trade-weighted basis, the USD is now down around 3% from last week’s highs. For the most part, currencies continued to take their cues from equity markets overnight. Indeed, a 5th straight day of gains in global stocks kept downward pressure on ‘safe-haven’ currencies like the USD and JPY and encouraged demand for ‘growth-sensitive’ currencies.

The S&P500 rose about 2.4%, while European equities increased 0.3-1.7%. Of note, the EuroStoxx 50 is now over 9% above its late May lows. Renewed appetite for ‘risk sensitive’ assets saw demand for US Treasury debt fall away; 2-year yields rose 4bps to 0.77% and 10-year yields climbed 6bps to 3.31%. Continuing the theme of the past week or so, the improved mood in global markets was linked to easing concern about the European sovereign debt crisis.

Investors took heart from successful government bond auctions from Spain (€5.2b), Belgium (€2.5b), and Ireland (€1.5b). Better news on Europe’s debt situation forced traders to again cover short positions in the EUR. EUR/JPY jumped over 1% to 113.00 and EUR/USD climbed from 1.2200 to almost 1.2350 – a near 3 week high. It wasn’t all good news for the EUR though.

The German ZEW survey showed economic sentiment plunged from 45.8 to 28.7 in June, far weaker than the 42.0 expected. The ECB also announced it will apply a 5% haircut on Greek bonds used as collateral, following yesterday’s Greek downgrade to ‘junk’ status. With the EUR leading the charge, all of the major currencies gained ground against the USD overnight.

The only real exception was the JPY. Indeed, USD/JPY has spent most of the past week in a sideways 90.80-92.00 range, reflecting the recent improvement in risk appetite. Last night’s UK data was a bit mixed. Still, it appeared to matter little for GBP/USD which was dragged up to 1.4820 in line with a slightly softer USD. UK CPI inflation was not quite as strong as markets expected, falling to 3.4% in May from 3.7% (3.5% expected).

Meanwhile, the May RICS house price balance showed UK house prices rising at their fastest rate so far this year (22% vs. 15% expected). Looking ahead, we suspect the current backdrop of buoyant equity markets and easing fears about the European debt crisis will see any gains in the USD index limited to around 86.90 in the short-term. Initial support will be found on dips towards 85.20.

* Mike Jones is part of the BNZ research team. All its research is available here.