By Mike Jones
NZD
The NZD has spent the past 24 hours consolidating in a 0.8320-0.8375 range.
Yesterday we warned of the risk the RBA could hold rates at 4.25%, sending the AUD and NZD higher (a 25bps rate cut was 75% priced in). This broadly panned out. The RBA refused to cede to expectations of a cut, noting growth is around trend and inflation is close to target. However, the RBA remains on a clear easing bias. Indeed, the Bank hinted at further rate cuts “should demand conditions weaken materially”.
Australian interest rates jumped in response to the RBA’s surprise decision (see Fixed Interest), launching the AUD/USD from 1.0720 to 6-month highs above 1.0800. The NZD/USD briefly spiked to 0.8365 in the AUD’s wake, before heavy NZD/AUD selling kicked the NZD/USD lower. NZD/AUD skidded from 0.7790 to closer to 0.7730, with custodial and macro accounts noted sellers.
It’s worth noting, NZ-AU 3-year swap differentials plunged from -105bps to -125bps in the wake of the RBA decision. This has shaved around a cent off our NZD/AUD “fair-value” estimate. Our short-term valuation model (which is based on NZ-AU interest rate differentials, commodity prices and relative business confidence) now suggests a “fair-value” range of 0.7450-0.7650. As such, we suspect NZD/AUD will struggle to sustain gains above 0.7770 in the near-term. Thursday’s NZ employment figures will be the next key release to watch for direction in NZD/AUD.
Overnight, no surprises for who was in the headlines. Yes, Greece. But this time it was in a more optimistic light. Chatter that Greece is a step closer to the next tranche of EU/IMF bailout cash solidified investors’ risk appetite and lit a rocket under the EUR. Positive risk sentiment underpinned a spurt higher in NZD/USD to 0.8360, while the firmer EUR knocked NZD/EUR from 0.6370 to 0.6300.
For today, the NZ and Australian data calendars are all but empty. In the absence of any further surprises on Greece, we expect the NZD/USD will spend more time consolidating in the familiar 0.8300-0.8380 range.
Majors
“Safe-haven” currencies like the USD and JPY underperformed overnight as optimism about a resolution to the Greek crisis bolstered investors’ risk appetite. The USD index ended the night 0.6% lower at 78.60.
Currency markets were becalmed through the first part of the night, reflecting a dearth of news. Fed Chairman Bernanke’s testimony to the Senate Budget Panel was largely ignored. Swiss National Bank chief Jordan managed to elicit more of a reaction. His reiteration of the SNB’s EUR/CHF “floor” at 1.20 saw the EUR/CHF jump from 1.2060 to around 1.2090.
However, later in the night, the mood brightened considerably. The Greek government was reported to have agreed on a package of budget reforms, paving the way for the next slab of IMF/EU bailout cash to be delivered. Rumblings of an impromptu EU finance ministers’ meeting Wednesday/Thursday and a Greek parliamentary vote on Sunday were enough to keep the positive sentiment going.
Renewed optimism around Greece solidified investors risk appetite, helping stock markets reverse earlier losses. The Eurostoxx 50 closed up 0.3% and the S&P500 is currently up 0.2%. The VIX index (a proxy for risk aversion) declined from above 18.0 to around 17.5.
After treading water for most of the night, the Greek news lit a rocket under the EUR. EUR/USD leapt from 1.3100 to above 1.3250. Most of the major currencies were dragged higher in the EUR’s wake, contributing to a broad-based weakening in the USD.
Looking ahead, there is little event risk to watch out for over the next 24 hours. We suspect whether the EUR can hold onto its recent gains will largely depend on the ECB’s policy meeting on Thursday. A rate cut would be a surprise (only 60% priced) and likely drag the EUR lower. Conversely, if the ECB indicates its willingness to participate in the Greek PSI deal further EUR gains could be in the offing. Ahead of the ECB, the EUR/USD break above resistance at 1.3230 suggests some further updrift is on the cards.
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