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By Mike Jones

The NZD/USD has begun the week much as it began the last, consolidating around 0.7000.

Currency markets have been a little whippy early in the week as uncertainty about sovereign risk has seen investors’ appetite for risk fluctuate.

Hopes the Eurozone would stump up with financial aid for Greece provided initial support to ‘risk sensitive’ currencies like the NZD yesterday. Weekend press reports suggested a support package worth €25b was in the offing, pitching NZD/USD above 0.7050.
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By Mike Jones

The NZD/USD spent most of last week chopping broadly sideways in a relatively tight 0.6950-0.7100 range.

The global outlook has become more NZD supportive of late as forecasts for the global economic expansion continue to rise and concerns around Greece, and its potential implications for global markets, diminish. The associated gains in investors’ risk appetite pitched NZD/USD to a 5-week high of nearly 0.7100 last week. Our risk appetite index (which has a scale of 0-100%) has risen to 70% – the highest since May 2008.
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By Mike Jones

After hitting 5-week week highs on Wednesday, NZD/USD has crashed back to Earth over the past 24 hours. A steady stream of NZD-negative news has knocked NZD/USD back to 0.7000.

Yesterday’s RBNZ Statement proved a tad more dovish than market expectations, as we suspected. Growth appears to be turning out much as the RBNZ expected and inflationary pressures look contained. This being so, it was little surprise the Bank maintained its expectation to “begin removing policy stimulus around the middle of 2010”.

But markets were more interested in the bank’s assertion higher bank funding costs will “reduce the work that monetary policy might otherwise need to do”. OCR tightening expectations were trimmed back accordingly (2-year swap rates fell around 6bps), knocking some of the wind out of NZD/USD.
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By Mike Jones

NZD/USD has drawn support from both home and abroad to reach a 5-week high of nearly 0.7100. In fact, the NZD has been the strongest performing currency over the past 24 hours.

Yesterday’s 5.7% increase in the Q4 terms of trade was the strongest since 1976. While clearly positive, this needs to be put in the context of a more than 15% cumulative fall over the preceding six quarters as the global financial crisis hit. Still, the data was very much consistent with the ongoing economic recovery we expect in NZ, and helped NZD/USD start the night of a firm footing.

Overnight, improving confidence about the global backdrop saw the NZD extend its gains.

Not only did Chinese trade data show Chinese exports going from strength to strength (rising 45.7%y/y in February), but comments from former EU Commission President Prodi reinforced expectations the Greek crisis is past the worst.

Reflecting the positive sentiment, the S&P500 posted its 5th consecutive gain and European equities also enjoyed modest gains.

As a result, investors shunned the ‘safe-haven’ appeal of the USD and JPY in favour of higher yielding currencies like AUD and NZD. NZD/USD was pitched from 0.7060 to nearly 0.7100, before a sharp slide in gold prices knocked NZD/USD from its highs.

We’re bracing for a wild ride in the NZD today. Undoubtedly, the main event will be the RBNZ’s Monetary Policy Statement at 9am. But the excitement doesn’t stop there, with Australian employment at 1:30pm and the February Chinese data ‘dump’ at 3:00pm (including retail sales, CPI, PPIs, and industrial production).

We expect the RBNZ will stay “on message”, affirming its mid-year focal point for starting to increase its OCR. While recent local data, and international events, argue for more of a delay, forward-looking indicators, and the May Budget, suggest there will be enough momentum to keep the Bank on its previously stated course.

We retain our long-held view of a first hike, in June, of 25bps. However, we’re mindful of the risk the bank delays tightening until July, or even September. Given market pricing is centred on a June 25bps hike, any such dovish undertones would provide clear headwinds for NZD/USD, and more so NZD/AUD. Near-term support for NZD/USD is seen towards 0.6950, and 0.7630 on NZD/AUD.

Majors
Similar themes prevailed in currency markets overnight. Commodity-related currencies extended their recent gains, while ‘safe-haven’ currencies like USD and JPY were sold across the board. Meanwhile, GBP continues to flounder.

Risk appetite was bolstered by further evidence the Chinese economy is going from strength to strength. Yesterday’s February trade balance dipped by less than expected, underpinned by a whopping 45.7%y/y gain in Chinese exports (38.3% expected). This only reinforces the case for stronger Yuan, something we expect from around mid-year.

Increased confidence about the global outlook was backed up by modest gains in global stocks. The S&P500 is currently up around 0.5% ¬– the 5th consecutive daily increase. European bourses posted gains of 0.7-1.0%. While US wholesale inventories data was a touch weaker than expected (falling 0.2%m/m in January compared to +0.2% expected), further signs of recovery in M&A activity spurred optimism about the US outlook. Talk from former European Commission President Prodi that Greece’s problems are “completely over” and contagion to the rest of Europe is unlikely also underpinned appetite for risk last night.

The VIX index (a proxy measure for global risk aversion) dropped as low as 17.5% at one point (the post crisis average is around 29.5%). Sliding risk aversion and optimism about the global backdrop saw investors bail out of ‘safe-haven’ positions in the USD and JPY, in favour of higher yielding currencies like EUR, AUD and NZD.

A heavy toll was taken on JPY in particular. USD/JPY rose above 90.70 for the first time since February. Speculation is rife that the Bank of Japan will further ease monetary policy next week, in an effort to stave intensifying deflationary pressures. Yesterday’s 3.7%m/m fall in January’s machine orders only served to highlight the dire Japanese outlook.

GBP also remains in the doldrums. Hot on the heels of yesterday’s woeful trade data, January’s manufacturing production showed a surprise fall (-0.9%m/m vs. 0.2% expected), and industrial production also disappointed (-0.4%m/m vs. 0.3% expected). Despite the softer USD, GBP/USD slipped from below 1.4900 from around 1.4980. Comments from Prime Minister Brown that the UK would likely retain its AAA rating provided some solace later in the night, and GBP/USD ground back towards 1.4950.

Sentiment towards GBP remains extremely negative. In fact, the speculative community hold the largest net short position in GBP on record (70,790 contracts), raising the risk of a bounce in coming days.

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

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.

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By Mike Jones

The NZD has been the strongest performing currency over the past 24 hours. After a gallop higher yesterday morning, the NZD/USD spent the overnight session consolidating around 0.7000.

Yesterday’s Q4 GDP indicators were a clear reminder of the NZ economic turnaround we believe is brewing. Indeed, the manufacturing and construction results were each clearly better than we expected. All told, yesterday’s numbers bumped up our production GDP growth estimate to 0.8%, from 0.4% (official GDP figures are due for release on 25 March).

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