By Mike Jones
NZD
The NZD continues to dance to the beat of global risk appetite and equity market sentiment. On Friday, the NZD/USD leapt nearly a cent as Greek optimism and encouraging global data underpinned a strop higher in US stock markets. In other words, risk on.
Looking ahead, economic news looks set to take a back seat this week. Negotiations around the US fiscal cliff and Greece’s latest bailout deal are holding markets captive.
It appears Greece will get the sign-off from European finance ministers tonight. This has largely been priced in already though, so the market reaction is likely to be modest.
Fiscal cliff discussions, in contrast, have definite potential to dampen investors’ upbeat mood. The two parties are still a long way from reaching a compromise on what to do about the cliff.
As a result, political grid-lock and uncertainty may pose short-term headwinds for equity markets and risky assets like the NZD/USD.
The recent NZ economic news has been unequivocally soft (our NZ economic surprise index is consistent with the NZD/USD at 0.7500). But this week’s data may help restore faith in the NZ recovery.
The highlight of this local data calendar will be Thursday’s ANZ business survey (the rebadged “NBNZ” survey).
We expect it to hold up, consistent with decent GDP expansion. In its detail, we’ll be watching the employment and inflation indices most closely.
For Tuesday’s merchandise trade data, we expect a $336m monthly deficit, above the $526m shortfall expected by the market.
Still, global factors will continue to dictate direction for the currency this week. Today should be quiet as investors await tonight’s news on Greece.
There’s also the Catalonia regional election to watch in Spain (see Majors).
A Greek bailout deal may carry the NZD/USD a little higher, but we expect sellers will be encountered on any bounces into the 0.8290-0.8310 window.
All up, we suspect this week will bring more sideways consolidation in the 0.8115-0.8310 range.
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Majors
It’s the start of another week and markets are once again waiting for Greece.
European finance ministers meet (again) tonight and the broad consensus seems to be that Greece’s next tranche of aid will finally be approved (although various news reports remind us there are still a few hurdles to overcome).
Rumours that the IMF may be taking a more conciliatory view on Greece’s debt targets (increasing the target to 124% of GDP by 2020, rather than 120%) have helped fuel investors’ optimism in this regard.
Friday’s session was all about pricing in a higher chance of a positive outcome on Greece.
Upbeat economic data reinforced the ‘risk-on’ mood. November’s German IFO exceeded all expectations, adding to the recent positive signals on the global economy.
Global equity indices rallied strongly (the S&P500 capping off the second strongest week of the year), commodity prices rose, and measures of risk appetite continued to climb.
In currency markets, the relative ‘safe-haven’ of the USD and JPY was shunned in favour of the EUR, GBP, NZD, AUD, and GBP. Gains of between 0.6% & 1.0% in these currencies places them all back in the middle of recent ranges.
Given Friday’s price action, the likely relief rally in the EUR and risk assets from a Greek deal being reached should be modest. We doubt the top of the recent 1.2660-1.3175 EUR/USD range would be taken out.
However, the reaction to a stalling in Greek discussions could be quite savage. Key near-term EUR/USD support is eyed at the 200 d.m.a at 1.2805.
Another test of European unity is currently underway in the form of the Catalonia regional election. The pro-independence incumbent Mas has promised to hold a referendum on seceding from Spain if he is elected.
As such, a convincing victory for Mas could be negative for the EUR. However, we note that a referendum is likely to be blocked by the Spanish government on constitutional grounds.
Elsewhere this week, expect renewed focus on the fiscal cliff, as US Congress returns after the Thanksgiving break. After the initial talks were labelled “constructive”, it seems the battle lines have been redrawn.
Investors have priced in a higher chance of a resolution of late, so signs the two parties remain some way off a compromise would likely weigh on risk sentiment and boost the USD.
Other News:
*German IFO business climate 101.4 (99.5 expected), current assessment 108.1 (106.3 expected, expectations 95.2 (93.0 expected).
Event Calendar:
26 November: US Chicago Fed index; US Dallas Fed index; EU finance ministers meet; 27 November: NZ trade balance; AU balance of payments; CH industrial profits; NZ RBNZ inflation expectations; UK GDP; US durable goods orders; US consumer confidence; 28 November: AU construction work; US new home sales; US Fed's Beige Book; 29 November: NZ ANZ business confidence; EU German unemployment; US GDP; US pending home sales; 30 November: NZ building permits; JN jobless rate; EU German retail sales; US personal income; US Chicago PMI; 1 December: CH manufacturing PMI.
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