By Mike Jones
NZD
After starting last week on the back-foot, the NZD/USD recovered its poise late last week as skyrocketing NZ GDP data forced traders to unwind NZD/AUD short positions.
Along with less downbeat offshore sentiment, this saw NZD/USD finish the week up around 0.8360.
For this week, Wednesday’s ANZ business survey promises to be the local data highlight.
While it remains vulnerable to the drought catching up with it, there is a lot else to keep the survey averages well afloat. Recall February’s survey was consistent with 4% GDP growth this year.
The drought will also make its present felt in February’s trade balance figures, due Tuesday. We expect a 3% fall in export values, and a 2% annual increase in imports. This would deliver a surplus of $34m, worsening the annual trade deficit to $1.48b.
Still, potentially more important for the NZD could be the announcement of Fonterra’s interim results on Wednesday. Fonterra may use the opportunity to update its payout forecast.
We think there is room for an increase to the payout given the recent surge in dairy prices.
Our recent NZD/USD view has been that dips below 0.8200 were unlikely to be sustained given supportive ‘fundamentals’. Last week’s news and price action has increased our conviction here.
Our momentum model recently cut its NZD/USD short position and is now neutral. The NZD/USD also managed to close back above the 200-day moving average last week, a bullish signal.
Local GDP figures confirmed the NZ economy continues to outperform its G10 peers, and the FOMC minutes suggested Fed easing will continue until the end of the year at least.
Still, the near-term outlook remains contingent on Europe, and Cyprus and Italy in particular (see Majors). Taking an optimistic view here, we should see NZD/USD back above 0.8400 at some point this week.
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Majors
Deal or no deal? The answer to that question promises to dictate currency market sentiment early in the week.
On Friday, equity and risk markets rallied on the hope that a bailout deal for Cyprus was close to being agreed upon.
News that Italian President Napolitano had given Bersani the mandate to form an Italian government also bolstered sentiment.
US stocks climbed 0.6% to 0.7%, helped by encouraging earnings reports from Nike and Tiffany.
As Italian and Spanish government bond yields drifted lower, EUR/USD was propelled from 1.2900 to almost 1.3000. Safe-haven currencies like the USD and JPY were generally shunned.
Depending on which newswire you look at, it appears a bailout deal for Cyprus is nearing completion (see below for latest details). Markets have increasingly priced in a benign outcome where a deal is reached before tonight’s ECB deadline.
Still, there is probably potential for an additional small relief rally in the EUR/USD and Asian stocks today should the deal be finalised. In contrast, more delays and uncertainty would undermine risk sentiment and send EUR/USD back below 1.2900.
It will also be worth keeping an eye on the Italian headlines this week as Bersani tries to cobble together a coalition government.
The Italian political gridlock has been one factor weighing on the EUR of late, so a resolution would be a clear EUR positive.
The potential for the EUR (and other currencies) to rally is amplified by the positioning of the speculative community.
According to the IMM data, net USD longs increased to the highest level since July last week. There is now a risk that the speculative community closes off some of this exposure in the run-in to the Easter holidays. If so, the USD could suffer.
Data-wise, the week ahead looks quiet. US data is mostly second tier, with Tuesday’s durable goods orders perhaps the highlight. The final estimate of Q4 US GDP is expected to be confirmed at 0.5% on an annualised rate.
The UK, European, and Australian data calendars are all fairly unexciting. There is a smattering of Fed speak littered through the week; Bernanke is speaking at a BoE-hosted debate tonight. But we doubt we’ll learn anything over and above the info-content of last week’s FOMC minutes.
Other News:
*Troika hikes Cyprus’s bailout contribution to €6.7b from €5.8b, but savings accounts of €100k or less will now be protected from the whopping 20% deposit levy.
*German IFO falls in March, for the first time since October, in another sign the recovery in Europe is losing steam (106.7 vs. 107.7 expected).
* Fitch places UK’s AAA rating negative watch.
Event Calendar:
25 March: US Chicago & Dallas Fed indices; Fed’s Bernanke, BoE’s King, and IMF’s Blanchard speak in London;
26 March: NZ trade balance; AU RBA’s Stevens speaks; US durable goods orders; US consumer confidence; US new home sales;
27 March: NZ ANZ business survey; AU RBA Financial Stability Review; EU CPI; US pending home sales; US Fed’s Rosengren & Kocherlakota speak;
28 March: NZ building permits; AU credit; NZ credit; EU German unemployment;
29 March: Good Friday holiday; US Michigan consumer confidence.
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