By Mike Jones
NZD
A more cautious attitude towards ‘risk’ continues to weigh on the NZD as offshore markets fret about Cyprus.
The NZD/USD dribbled lower again overnight, but the losses were limited to around 0.8230. In contrast, the EUR has copped another thwacking, pushing NZD/EUR up to the key 0.6415 resistance level.
News this morning that Cypriot lawmakers have rejected the bailout package has plunged markets back into turmoil (see Majors). Equity markets and the EUR have suffered.
Our risk appetite index (which has a scale of 0-100%) has plunged from 82.6% on Friday to 72.1% this morning.
The scuttling of investors’ risk appetite has taken some of the shine off the NZD, but the kiwi continues to hold up better than most.
This likely reflects a) investors’ perception that the fallout from Cyprus won’t derail the global recovery and demand for commodities, and b) another stellar milk price auction overnight.
Milk prices soared another 14.8% at the GDT auction. This is the 7th consecutive fortnightly gain and brings prices to 38% above December levels and a whopping 77% above the mid-May lows.
Of course, the ‘good news’ of higher milk prices must be tempered by the fact that low volumes thanks to the NZ drought are largely responsible for the gains.
Indeed, volumes at last night’s auction were down noticeably (20% compared to the previous forecast for this auction).
We’re expecting today’s Balance of Payments figures to register a year-to-December current account deficit of 5% of GDP, up from 4.7% in Q3 (market 4.9%). We doubt this sort of deterioration in the external accounts would trouble the NZD much.
Instead, the NZD/USD will continue to take its cues from offshore.
Indeed, the next 24 hours is stacked with global event risk. Not only will the market keep a wary eye on Cyprus headlines, but there is the UK Budget to monitor tonight and the FOMC meeting tomorrow morning (7am NZT).
Near-term support for the NZD/USD is eyed at 0.8190 with deeper support at 0.8160.
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Majors
Risk sentiment has deteriorated sharply early this morning after Cyprus's Parliament rejected the terms of its bailout package. As a result, ‘safe-haven’ currencies like the USD and JPY are outperforming.
The EUR/USD is bearing most of the brunt of the stronger USD, sliding to 4-month lows below 1.2860.
A failure to agree on a bailout package (and some form of ‘deposit tax’) may result in Cyprus getting booted out of the Eurozone. But the consequences of voting in favour of the package are hardly favourable either.
According to estimates from the central bank, the introduction of the deposit tax could see outflows of at least 10% from the Cyprus banking system in a matter of days.
The simple fact is there is no precedent here. And it is this uncertainty that is causing headaches for investors.
A late sell-off has seen global equity markets notch up losses of 0.4-2.2% with the VIX index (a proxy for risk aversion) leaping from below 13% to almost 15.5%.
The more risk averse sentiment has produced the usual and expected reaction in currency markets. The JPY and USD are back in vogue with the EUR and European currencies underperforming.
Interestingly, the usually high beta NZD, AUD, and CAD have held up better than most, suggesting investors believe the Cyprus issue and risk of contagion in Europe is not yet a serious threat to the global recovery.
The GBP has also held up admirably even since the Cyprus news broke (EUR/GBP has fallen 1.6% this week), portending something of a return of the GBP’s ‘safe-haven’ status in times of EU trouble.
Tonight’s UK Budget will determine whether this continues. We expect a “fiscal conservatism and monetary activism” theme to emerge, which risks reintroducing downward pressure on the GBP.
Note that the Bank of England MPC minutes will also be released tonight.
For today, we expect renewed uncertainty and risk aversion will keep the USD well supported. The EUR/USD should struggle to sustain bounces towards 1.2910, with a break below 1.2800 now the bigger risk.
Key event risk for the USD will come from tomorrow morning’s FOMC minutes. These seem unlikely to surprise, but a modest downgrade of the FOMC’s US economic view could provide pause in the USD uptrend.
Other News:
* The Eurogroup issues a statement reiterating the one-off nature of the levy on Cyprus bank deposits.
*US housing data continues to surprise on the upside: housing starts +917k in Feb (915k expected) with positive revisions to history; building permits 946k (925k expected).
*Italian January industrial production rises a solid 0.8% m/m.
*The ZEW German analyst survey for February showed current conditions rising to 13.6 from 5.2 – well above forecast.
* UK consumer prices rose by 0.7% in February in line with market expectations.
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