by Kymberly Martin
NZD
The NZD was on a steady upward trend on Friday night. Despite unresolved political issues in Europe risk appetite was underpinned by positive European data releases (see Majors).
Our risk appetite indicator (scale 0-100%) moved up from 59% to 62%.
European equities recorded positive returns (Euro Stoxx 50, 1.2%). The NZD/USD traded up from 0.8130 to close the week at almost 0.8190.
The NZD/EUR was more range-bound, trading below 0.6170 on Friday evening before returning to close above 0.6190.
The NZD/GBP fell sharply after the release of positive UK retail sales data (see Majors). However, it soon clawed its way back to close the week just below 0.5080, curtailing a fairly hefty fall for the week.
Still, we believe that very loose monetary policy in the UK compared to a tightening bias from the RBNZ, along with relatively stronger growth prospects in NZ should underpin the NZD/GBP over the medium-term.
This is despite the NZD/GBP being notably (25%) “over-valued” on a long-term purchasing power parity (PPP) basis.
Expect some volatility in the NZD this week. We have Thursday’s RBNZ meeting along with a number of global political and data hurdles to navigate.
For now, solid support for the NZD/USD remains around 0.8120. Resistance is eyed in the region of 0.8220.
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Majors
The USD was broadly weaker on Friday as risk appetite was underpinned by positive European data releases. The USD index slipped to 79.20.
On Friday evening the German IFO business survey surprised to the upside with the headline climate indicator at 109.9 (109.5 expected). This saw the EUR/USD surge from around 1.3140 to 1.3180.
It continued its ascent later in the night to close the week around 1.3220. Subsequent news over the weekend was less EUR supportive.
Additions to the IMF fund for fighting the EU crisis, negotiated at the G20 conference, failed to provide positive surprises.
There is also plenty happening on the political front. President Sarkozy (25.5% of votes) has progressed to the second round of the French election along with Socialist Hollande (28.4%). The final vote will take place in 2 weeks.
There were also political rumblings in Holland after the government was unable to meet agreement over austerity measures required to meet EU deficit rules. PM Rutte now says elections are likely.
The GBP was boosted by positive data releases on Friday. The GBP/USD rose after the release of March retail sales data (1.8%m/m vs. 0.5% expected). The GBP/USD moved up from 1.6060 to close the week around 1.6120. It is now at its highest level since November, near key resistance.
In the backdrop of broadly supportive risk appetite, the AUD was relatively well supported alongside the NZD. The AUD/USD moved up from 1.0320 to end the week at 1.0380.
Key for the AUD this week will be the AU CPI release tomorrow. Saving a significant high-side surprise (say 0.8%q/q vs. market expectation of 0.6%) we see this as the final hurdle for a rate cut from the RBA at its next meeting on May 5. However, we continue to believe that market expectations for around 94bps of further rate cuts from the RBA in the year ahead are too aggressive.
There is plenty to provide volatility in currency markets this week. Along with political developments in Europe there is a heavy data calendar.
There is European PMI data released today along with the China HSBC flash manufacturing PMI. The US Fed (Wed) and the Bank of Japan (Fri) both announce rates this week.
There are also a number of European sovereigns returning to markets for funds.
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