by Mike Jones
NZD
The NZD continued to slide last week, as risk aversion and nervousness about the global backdrop took hold, denting sentiment towards ‘growth-sensitive’ currencies.
On Friday night, the NZD/USD slumped to a fresh 4-month low around 0.7815.
Negative news on both the global and domestic economies has weighed on the NZD over the past fortnight. We suspect we’ll see more of the same this week.
Domestically, will today’s BNZ PSI slump (the way the PMI did for April), or power on from its 53.9 level of March? Whatever the case, a negative result is almost assured for this morning’s Q1 retail volumes. We’re picking a 1.5% drop (market -0.5%) – but only as a natural hangover to the Rugby World Cup inspired 4.7% surge over 2011 H2.
Important for the ‘commodity-sensitive’ NZD, there is a good chance milk prices fall again at Wednesday morning’s Fonterra milk auction.
Globally, risk appetite is enjoying something of a boost from the weekend’s Chinese RRR cut (see Majors). However, we doubt it will be long before European gloom sets in again.
Greece still doesn’t have a government and the risks of a Greek exit from the Eurozone are rising. Meanwhile, estimates of the cost to the Spanish government of bailing out its troubled banking sector continue to be revised higher.
All up, we see room for the NZD/USD to fall further in the short-term. Not only are the dark clouds gathering over Europe again, but NZ commodity prices are still falling and domestic economic momentum is weak.
As we noted in last week’s strategy note, with momentum factors negative, we we could see NZD/USD move lower to test support at 0.7780 in coming sessions.
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Majors
Currency markets finished last week in a similar fashion to how they began, with risk aversion on the ascendancy. The ‘safe-haven’ USD and JPY remained in vogue.
Friday’s news of JP Morgan’s shock US$2b trading loss re-introduced banking sector worries into the already unpalatable mix of European uncertainty and global growth concerns. These concerns were further inflamed by Friday’s softer-than-expected Indian and Chinese industrial production data.
Market chatter Greece could finally be close to forming a government provided the odd glimmer of good news. But the rumours proved unfounded, and the pessimists won out in the end. News Spain will force banks to make a further €30b in provisions against housing sector losses simply reinforced the downbeat mood.
The S&P500 finished the session down 0.3%, to be down 1.1% for the week. Meanwhile, the CRB global commodity price index slipped a further 1% to the lowest level since October last year. Against a backdrop of risk aversion and equity market weakness, investors added to JPY and USD longs, mostly at the expense of the AUD and GBP. In contrast, the EUR/USD remained resilient, chopping sideways in a volatile 1.2910-1.2960 range.
Over the weekend, the PBOC finally responded to calls for easier Chinese policy, cutting banks’ reserve requirements 50bps. This is the third such easing in 5 months. We suspect there will be more. The RRR cut should provide a small boost to risk sentiment early in the week. However, we suspect it won’t be long before attention returns to Europe.
Indeed, there is still no resolution to the Greek political stalemate. Greek politicians met again overnight, but the most likely outcome looks be another election in June sometime.
The resultant uncertainty is likely to keep markets fickle and generally sway investors away from ‘risk-sensitive’ assets.
Markets are also a little nervous about what might come out of new French President Hollande’s meeting with German Chancellor Merkel on Tuesday. Greece is also likely to receive plenty of air time during tonight’s Ecofin/Eurogroup meetings.
Elsewhere, Tuesday’s RBA minutes and Eurozone GDP figures, Wednesday’s BoE inflation report, and Thursday’s FOMC minutes will all be worth keeping an eye on this week.
All up, the stage appears to set for more European headline watching this week.
Risk sentiment is negative, and ‘safe-haven’ currencies like the USD and JPY are biased to strengthen further. Given this, positive news on the global economy would be the biggest surprise for markets and hence elicit the largest reaction in currencies.
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