In bid to drop debt/GDP to 100% by 2020, Cypriots will be taxed on bank deposits and in return will receive shares in banks

By Kymberly Martin

NZD

The NZD recovered from its post-RBNZ fall on Friday night, to close at 0.8280.

The NZD appeared to have regained its composure at the end of the week following its post-RBNZ meeting decline. It was supported by a solid BNZ PMI release on Friday.

At 56.3, the manufacturing survey was firmly in expansion, up 1.1 points on the previous reading.

However, the currency is opening lower this morning following risk-negative news from Cyprus over the weekend (see Majors). The NZD/USD is currently around 0.8230. Key support remains at 0.8160.

The impact of the news will play-out across markets today and in weeks to come. However, it does serve as a reminder that despite very solid domestic fundamentals the NZD remains a ‘risk sensitive’ currency. It is vulnerable to shifts in global risk appetite. This is particularly relevant given our global risk appetite index (scale 0-100%) sits at a fairly heady 83%.

The NZD/AUD found its feet on Friday, rebounding from two month lows, to close at 0.7950. The relative strength in the AUD in recent months has come from the market reducing expectations for RBA cuts in the year ahead. The market now prices only 10bps of cuts.

There will be plenty of noise from the RBA this week with potential to influence expectations, and by implication the NZD/AUD.

Tomorrow, the RBA’s March minutes are released, and the RBA’s Lowe and Debelle have scheduled speeches. On Thursday the RBA publishes its bulletin (including fx transactions).

The key NZ data this week is Thursday’s Q4 GDP release. We expect it to be solid at 0.8%, but feel it could easily be a few points either side, reflecting the current tug of war in various indicators. In the current environment we think the NZD would be more sensitive to a downside surprise.

----------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

------------------------------------------------------------------------------------------------------------------

Majors

USD weakness was the broadest theme on Friday. The strongest performers were the JPY and CHF.

Broadly, risk appetite was still clinging on at elevated levels on Friday. However, equities on both sides of the Atlantic failed to provide positive returns.

The US Empire Manufacturing survey (9.24 vs. 10.0 expected) and CPI (2.0%y/y) were fairly benign. However, the University of Michigan consumer confidence survey was weaker-than-expected (71.8 vs. 78).

This likely reflects the impact of the US payroll tax hike and rising gasoline prices. The USD index fell from 82.60 to 82.10.

While the EUR/USD rebounded from 1.3020 to 1.3080, the GBP/USD appears to be consolidating around the 1.5100 level. The rebound in sterling from the lows of 1.4830 last week likely reflects some short covering, rather than a significant shift in fundamentals. These remain weak.

The major news over the weekend came from Cyprus. Under pressure from the Eurogroup, and in a bid to reduce debt/GDP to 100% by 2020, the nation has negotiated a number of measures.

These include a one-off tax of 6.75% on bank deposits up to EUR100k, and a 9.99% tax for larger deposits. In return, depositors will receive shares in Cyprus banks.

The bill must yet be passed by the Cyprus parliament early this week. However, depositors have already been queuing to remove deposits from accounts, only to find these have been frozen.

The bigger issue is the precedent the proposal may set for the Eurozone periphery as a whole. Officials have been at pains to emphasise that Cyprus is a unique case.

However, it raises questions about deposit insurance guarantees across the region. This should see volatility and risk aversion rise today.

The EUR is likely to be a casualty. However, ‘risk sensitive’ currencies such as the AUD and NZD will also be vulnerable.

In the week ahead, focus will remain on how events in Cyprus unfold. Wednesday also brings the latest FOMC rate decision and Bernanke’s associated Press conference. Friday’s highlight will be the German IFO survey.

All its research is available here.