Further Chinese policy easing can be expected which will cushion any declines in the AUD and NZD

By Mike Jones

NZD

The NZD/USD has leapt over ½ cent higher early this morning, to around 0.8390. This follows a surprise Chinese policy easing over the weekend (see below), which has bolstered investor demand for global “growth-sensitive” assets like the NZD.

Despite the strong start to the week, the NZD/USD remains firmly within the 0.8250-0.8420 range that has contained the currency over the past fortnight.

Last week, global risk sentiment and the NZD/USD were torn between the positives of improving US economic data, and the negatives of the European debt crisis. Our risk appetite index (which has a scale of 0-100%) was chopped around between 55% and 60%. As a result, the NZD/USD continued to track a volatile sideways path.

There was much more action in NZD/JPY. A surprise expansion to the Bank of Japan’s asset purchase (money printing) scheme launched the cross from 64.00 to 7-month highs above 66.00.

It’s a relatively quiet week ahead in terms of the NZ data flow. Tuesday afternoon’s inflation expectations survey will be the main event. We’re looking for the key 2-year ahead annual CPI expectation in the survey to edge down only a tad, from its very elevated 2.8% reading in November. Before this, today’s Q4 producer prices are expected to maintain a relatively firm pulse. Also today, we get January’s PSI and the crown accounts to December, which will likely show similar fiscal pressures to the recently released Budget Policy Statement.

None of this should be of any relevance to the NZD. Instead, offshore trends in risk sentiment should continue to dictate the fortunes of the currency. China’s surprise easing and hopes of more to come should continue to underpin investors’ risk appetite this week. What’s more, Europe’s finance ministers are close to (finally) agreeing on a second bailout package for Greece. If approved, this would provide an additional kicker for risk sentiment. 

Should positive trends in offshore risk appetite remain intact, the NZD/USD is likely to track higher this week. Resistance at 0.8420 may well be tested. However, keep a close eye on the Greek bailout news. More delays/disappointment on this front would rapidly undermine the “risk-sensitive” NZD/USD. A daily close below support at 0.8250 would suggest the uptrend has run out of steam.

Majors

It was a fairly sleepy session in currency markets on Friday. The USD index simply shuffled sideways in a tight 79.15-79.50 range.

Hopes a second Greek bailout package will be announced this week kept the rally in “risky” assets alive. The EuroStoxx 50 rose 1.2% on Friday, while the S&P500 ticked up a more modest 0.2%. The EUR/USD spent the night consolidating above 1.3100.

A modest upside surprise on January US inflation figures (2.9%y/y vs. 2.8% expected) helped USD/JPY finish the week on a strong note, as US interest rates ground higher. Widening US-JP interest rate differentials have been a key “fundamental” ingredient in the USD/JPY’s recent climb. US-JP 2-year bond spreads rose 3bps last week to 18bps, supporting the USD/JPY’s at near 6-month highs around 79.50.

On Saturday, the PBOC announced a surprise 50bp cut in Chinese banks’ reserve requirements. Investors had been hoping for more PBOC easing (which is positive for Chinese growth and therefore supportive of 'risk-sensitive' currencies like the NZD and AUD), but were not expecting any action ahead of February’s Chinese economy data.

This bringing forward of policy easing has seen the “safe-haven” USD start the week on the back-foot. Meanwhile, the AUD/USD has opened the week almost ¾ cent higher around 1.0760.

Despite January's spike in Chinese CPI, supporting growth (at or above 8%) still appears to be Beijing policymakers’ biggest priority. As a result, further Chinese policy easing can be expected. This should help cushion any declines in the AUD and NZD in coming months.

Also on Saturday, the Greek parliament passed the extra austerity measures required by the EU to gain access to more bailout cash. The ball is now in the court of the European finance ministers, who meet tonight. Overall, investors are still expecting a bailout deal to be announced tonight or tomorrow. However, there are still plenty of doubters. Indeed, a weekend Reuters report suggested the chances of a deal are about 50/50.

Investors are likely to remain on tenterhooks until an announcement on Greece’s bailout deal is made. Given this, it could be a quiet start to the week in currency markets. This is especially so given Monday is a holiday in the US. If a Greek deal is made, expect “risk-sensitive” assets to outperform and the USD to suffer. Later in the week, markets’ focus will move back to economic data.

All its research is available here.