The balance of risks are skewed in favour of a NZD/USD pullback: BNZ

By Mike Jones

A somewhat fractured first 24 hours of the new week, (nice weather now the weekend is over), with the NZD and AUD struggling somewhat. We open this morning to the NZD trading at the 0.8220 level, the AUD back at 1.0675.

The NZD has taken its cue from lower investor risk appetite and in our flows we can note leveraged trading accounts paring their overweight Kiwi “longs”, noting from last weeks IMM data that these positions are being trimmed from their most extreme levels in the past 3 months.

The big global macro story yesterday was China’s decision to revise down its official GDP growth target from 8.0% to 7.5%.

Speaking to the National Peoples’ Conference in Beijing, Premier Wen Jiabo announced the change, and we note that is the first time since 2005 that the 8 per cent growth target has been revised lower. It follows four years in which GDP has expanded by a cumulative 44 per cent with annual increases from 2008 onwards of 9.6, 9.2, 10.2 and 9.2 per cent respectively.

The downward revision to growth forecasts has impacted not only NZD, but also stock markets in the Asia region and risk assets more generally. The MSCI Asia Pacific Index (which had gained for 11 straight weeks) saw a 1 per cent drop and the Shanghai Composite Index fell 0.64%, though it is still up an impressive 11.2% year-to-date.
Ahead of this week’s RBNZ policy meeting, we saw the BNZ Confidence survey yesterday which was consistent with the recent increase in the NBBO survey.

The rise in confidence that we are hearing about is increasingly widespread. While there are some very strong indicators that say the RBNZ should go very soft at this week’s MPS, there remain enough positive leading indicators to suggest that complacency is unwarranted.

The latest Barfoot’s data shows that house sales continue to trend higher which is a positive leading indicator of prices and, eventually, building. House sales in February were 23% up on year earlier levels and 5.0% seasonally adjusted on the previous month. Sale prices, however, while still positive were up only 2.7% on year earlier levels. Not enough to have anyone down at the RBNZ concerned.

All up, as we wrote yesterday we are of the view the balance of risks are skewed in favour of a NZD/USD pullback in coming weeks. Not only have recent gains in risk appetite driven the NZD/USD well above ‘fundamentals’, but as mentioned the speculative community is heavily ‘long’ NZD.

This means that, if we do see further clouding of NZD sentiment, a squaring of these speculative positions could exacerbate NZD selling. In our opinion the currency remains overvalued on the basis of fundamental relationships with interest rate differentials and commodity prices. Technically speaking, a daily close below the pivotal NZD/USD level of 0.8250 would suggest the uptrend is over.

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Markets note China paring its 2012 GDP target rate and overnight the Euro zone PMI services data was weaker than expected and well into the contraction zone.
 
News media are reporting that Greece expects bondholders to accept a one-time offer to write off about EUR 100bio. Speaking in a Bloomberg interview, Finance Minister Evangelos Venizelos said, “This is the best offer because this is the only one, the only existing offer.” The success of the swap depends on how many investors agree to the write down by the March 8 deadline, as the EU faces a key test in its attempt to turn the page on the debt crisis.

According to reports there are 12 banks and investors, including large European banking names that have said today they planned to take up the offer, according to a statement from the Institute of International Finance. At the same time, Germany’s DSW investor protection group advised private sector bondholders to reject the Greek bond offer.
 
To start the week US data printed the January Factory Orders index which contracted slightly less than expected, while the February ISM non-manufacturing index beat expectations. For the latter, the prices paid component was notably high, while the key employment component was much weaker than expected, which has raised some eyebrows ahead of Friday's key Non-farm payrolls release.
 
This afternoon the RBA is not expected to make any change to interest rates, but after saying in February that there was scope for easier monetary policy if the economy weakened materially, the key interest will be as to whether there has been any change to that wording in the accompanying statement.

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