By Mike Jones
NZD
The NZD/USD spent most of last week trading choppily in the familiar 0.8270-0.8430 range.
Global risk appetite continued to improve last week. A surprise Chinese policy easing and the long-awaited announcement of a second Greek bailout package saw investors become more positive on global growth prospects. Global equity markets rallied and our risk appetite index (scale of 0-100%) rose from 61% to end the week around 63%.
These gains in risk appetite helped underpin “risk-sensitive” currencies like the NZD and AUD last week. However, the EUR was the star performer. Investors’ relief that Greece may yet avert a disorderly default spurred heavy speculative and real money demand for the EUR and EUR crosses. The NZD/EUR was knocked from above 0.6350 to around 0.6215 as a consequence. The weakening NZD/EUR helped limit NZD/USD gains to the 0.8400/0.8430 region last week.
We still think interest rate and growth fundamentals are skewed in favour of the NZD/EUR. As such, we doubt last week’s sell-off represents the beginning of a new downtrend. We forecast NZD/EUR at 0.6350 by June.
It’s worth noting, surging global oil prices may also have weighed on the NZD last week. Rising Iranian political tensions have seen prices jump 11% in February to date, to nearly US$110/barrel. Worries that higher oil prices (on supply concerns) could knock the steam out of global growth are a negative for “growth-sensitive” currencies like the NZD. This is an area to watch in coming weeks.
Stepping back from the near-term noise, the NZD/USD has spent February chopping sideways in a 0.8250-0.8430 range. Undoubtedly, short-term “fundamentals” suggest the NZD/USD should be lower. However, solid global risk appetite and a weak USD are keeping the currency elevated. As such, these trends will need to reverse if we are to see the NZD/USD break convincingly below 0.8250.
We doubt we’ll see any such trigger this week, so more rangy trading inside 0.8250/0.8430 can be expected. The biggest test of market sentiment will come with Wednesday’s ECB long-term refinancing operation (LTRO, see majors). There’s also an increase in the NZ data schedule, with Wednesday’s NBBO and today’s trade balance figures ($NZ339m surplus expected) the highlights.
Majors
The major currencies put in a generally mixed performance on Friday night. The USD index drifted off from 78.80 to around 78.40. The EUR remained in demand for most of the night, providing headwinds for the USD.
Recent EUR gains have come amid a clear easing in fears over contagion from Greece. Greece still has a number of bailout implementation hurdles to cross, but investors are now more confident these can be overcome. On Friday, a jump in German business confidence and the near-passing of the Greek PSI deal kept positive EUR sentiment intact. EUR/JPY surged from 106 to 109, underpinning a climb in EUR/USD from 1.3370, to two-month highs close to 1.3450.
Still, the most eye-catching move was a leap higher in USD/JPY, to nearly 81.00. This was thanks to more positive US economic news (consumer confidence hit one-year highs) and the Fed talking up US growth prospects (courtesy of St Louis president Bullard – a hawk). We look for some stabilisation in USD/JPY after the recent run up – unless global growth dynamics (and hence relative yield spreads) turn even higher.
The weekend’s G20 meeting was (yet) another unexciting affair. There were more soothing words about Europe. Encouraging for some, was Germany’s apparent softening of their previous view the Eurozone bailout fund doesn’t need to be topped up. Speculation is now rife that another huge (circa US$2t) package could be announced at the April G20 meeting.
Looking ahead, the EU summit on March 1 and 2 looks set to be another talk-fest. Big decisions/policy actions will likely be put off until the April meeting. In contrast, Wednesday’s second ECB LTRO could have a material effect on markets.
Market expectations are for anywhere from €400b to €1t of funding to be requested by banks at the LTRO (€489b was allotted in December). A take-up towards, or above, the upper-end of expectations would likely provide a boost for the EUR and “risk-sensitive” assets. The last, larger-than-expected LTRO, was certainly a big positive for market sentiment.
Near-term resistance on the EUR/USD is eyed on bounces towards December’s 1.3550 highs. Support should be found towards 1.3240.
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