By Mike Jones
NZD
The NZD has started the week in consolidation mode. The currency was side-lined overnight and, as a result, essentially drifted sideways in a tight 0.8335-0.8370 range.
The steady performance of the NZD (and AUD for that matter) is somewhat surprising given the carnage in Europe.
Investors’ initial relief over the signing of a bailout deal for Cyprus has given way to uncertainty and outright fear after an official implied the deposit levy used in Cyprus could become the norm for dealing with banking crises in Europe (see Majors).
Despite a plunge in the EUR, and consequent broad strengthening the USD, the losses in the NZD/USD were limited to around 0.8335.
Steady NZD/EUR demand and further gains in NZ-US interest rate differentials go some way towards explaining the resilience of the NZD.
The fact NZ needs six wickets today to secure its first Test cricket series win against England in 14 years may have also contributed (NZD/GBP rose above 0.5500 last night).
Still, EUR weakness and widespread risk aversion will certainly help slow the ascent of the NZD/USD. We suspect bounces towards 0.8400 will attract headwinds today. Solid support is expected around 0.8325.
The performance of Asian equity markets today, following the negative overnight lead, will be important for NZD sentiment. But keep an eye on NZ trade balance figures (due for release at 10:45am) as well.
The impact of the drought will certainly be felt in the February data. Dairy export volumes will be suppressed but with prices higher. And while meat production will likely be higher than normal, meat prices will be lower.
Overall, we expect a 3%y/y 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.
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Majors
The EUR has been the biggest loser overnight. The EUR/USD collapsed from above 1.3000 to 4-month lows below 1.2850.
The good cheer from the announcement of a Troika-brokered bailout deal for Cyprus didn’t last for long.
European equity markets and the EUR/USD briefly rallied before succumbing to a vicious bout of selling in the New York time zone.
European and US equity markets are down 0.5-2.3%, the VIX index (a proxy for risk aversion) has soared from 12.5% to 14.5%, and bond yields are mostly lower.
In currency markets, investors have rushed back into the relative ‘safe-haven’ of the USD and JPY (USD/JPY from 94.80 to 93.70), at the expense of the EUR, CHF, and GBP.
For the most part, NZD, AUD, and CAD have escaped the carnage relatively unscathed.
All of this fear and loathing comes after Eurogroup head Dijsselbloem suggested in an interview that the taxing of bank depositors as part of Cyprus’s rescue package may not be a one-off, and instead may become the new template for dealing with European banking crises.
To quote “if a bank gets in trouble, the response will no longer automatically be that we'll come and take away your problem”, “the uninsured deposit holders” may be called upon to help recapitalise the bank.
Sovereign bond spreads and risk premia are rising across the European periphery as investors again fret about bank runs and contagion.
Absent soothing counter comments from another European policymaker, it is hard to see what is going to break the current bout of risk aversion.
And with the latest German economic news being far from inspiring, the stage looks set for ongoing EUR weakness in the short-term. A daily close below the previous 1.2880 support level would pave the way for a deeper correction towards 1.2700.
Other News:
*The run of strong US data continues with the Chicago and Dallas regional manufacturing indices (which rose to 0.44 and 7.4 respectively).
*Cyprus secures a €10b bailout deal, involving a restructuring of the Cypriot banking system. Bank deposits under €100k will not be touched. Popular, the second largest Cypriot bank, will be wound up as part of the process with its assets split into a “good” and “bad” bank.
Event Calendar:
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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