By Mike Jones
NZD
Having opened the week ½ cent lower around 0.8230, the NZD/USD spent most of the overnight trading session licking its wounds. This, before a late short-covering rally in the EUR/USD helped drag the kiwi back above 0.8260.
Cyprus remains the focus of the market’s attention. Investors are holding their breath and hoping the ‘deposit levy’ used to bailout Cyprus won’t induce panic and deposit flight from elsewhere in peripheral Europe.
It’s too early to tell of course, but markets were able to take some comfort overnight from a delay and watering down of the ‘bail in’ proposal (see Majors).
Against this backdrop, the EUR/USD led an unconvincing short-covering rally across most of the major currencies.
We are hopeful that contagion from the Cyprus deposit tax news proves to be limited.
After all, various European financial market safe-guards are now in place and, in many respects, Cyprus is a ‘special case’ and hence won’t set a precedent for other, larger, debt-laden nations like Spain, Italy and Portugal.
But it is still a moving feast (the Cyprus government votes on the proposal tonight) so there is potential for risk aversion to further undermine the NZD/USD in the short-term. Key support is eyed at 0.8160, with interim support at 0.8190.
The week ahead is shaping up as another important one for the NZD/AUD.
The cross was knocked back below 0.8000 last week as the dovish RBNZ/strong AU employment double-act saw monetary policy expectations swing back in favour of the AUD.
BNZ economists have pushed back the expected timing of the first RBNZ rate hike to March 2014. Meanwhile, our NAB colleagues have trimmed the number of 25bps RBA rate cuts expected this year to two, from three.
These changes to the NZ-AU monetary policy outlook have seen us revise lower the extent of NZD/AUD appreciation expected this year.
We are still bullish, but have knocked our mid-year forecast down to 0.8200 and our year-end forecast down to 0.8500. Near-term, ‘fair-value’ is estimated to be between 0.7950-0.8150, according to our short-term valuation model.
Ahead of NZ GDP data later in the week, NZD/AUD will take direction today from across the Tasman. RBA officials Debelle and Lowe are speaking this morning, before the March RBA Board minutes are released at 1:30pm (NZT).
The Aussie OIS market has moved to price in 20bps of easing into the curve following yesterday’s Cyprus fallout. But should the tone of the minutes support the notion the RBA has finished easing, NZD/AUD will remain under the pump, and could test support towards 0.7900.
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Majors
Financial markets have re-gathered some of their poise overnight, having nose-dived in the wake of the weekend’s deposit tax debacle in Cyprus. As a result, the USD has given back a little of Monday morning’s gains.
European markets produced the expected reaction to the Cyprus news. Longer-dated Spanish and Italian bond yields jumped and European equities declined 0.5-1.3%, led by banking/financial stocks.
However, the mood did improve a little as the night wore on.
Having opened around 1% lower, the S&P500 has recovered lost ground, to be down 0.3% for the night.
The VIX index, meanwhile, has drifted off yesterday’s 13.5% highs and is now closer to 12.5% - indicative of a mild easing in risk aversion.
Gold prices, in contrast, remain around 0.9% above their Friday US$1590/ounce close.
Still, the mild and generalised improvement in sentiment has encouraged something of a short covering bounce in the EUR.
From the sub-1.2900 lows plumbed during London trading, the EUR/USD has climbed back above 1.2960. The AUD and NZD have been dragged higher in the EUR’s wake.
These moves follow the news that not only will the Cyprus parliamentary vote on the deposit tax be delayed again (to tonight, hence providing more time for the proposal to be watered down), but that the tax on deposits below €100k will be reduced from 6% to a more palatable 3%.
Perhaps more importantly, fears of bank runs and contagion outside of Cyprus have, so far at least, failed to materialise.
Looking ahead, tonight’s data schedule brings the German ZEW survey and US housing starts and building permits.
While a small improvement in the ZEW survey is expected, we suspect the EUR/USD will remain heavy in the short-term.
Not only are contagion fears from Cyprus likely to persist, but the Italian political deadlock now looks set to drag on for longer.
Near-term EUR/USD bounces towards 1.3000 are likely to be met with sellers, ahead of the FOMC meeting on Thursday morning.
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