By Mike Jones
NZD
After climbing to within a whisker of 0.8400, the NZD/USD crashed back to 0.8360 overnight as ongoing European turmoil took a toll.
In contrast, NZD/EUR has continued its strong run, and opens at 7 month highs around 0.6550.
Domestic fundamentals remain skewed in favour of NZD strength. We saw more evidence of this yesterday in the form of solid business confidence and Fonterra’s upward revision to its payout forecast.
The increase in the 2012/13 payout forecast, to $6.25-$6.30, if anything was a little stronger than we expected, and will help offset a decent chunk of the drought hit to dairy production.
Meanwhile, the March ANZ business survey showed businesses’ activity expectations remain consistent with GDP growth in excess of 4% this year.
Reinvigorated by these domestic positives, the NZD/USD spent most of yesterday flirting with 0.8400.
But overnight, European-centred risk aversion spoiled the NZD’s party. Signs of contagion from Cyprus, the Italian political impasse, and more weak data combined to pitch equities and the EUR/USD lower.
The NZD/USD was dragged back to around 0.8360 in the EUR’s wake. Once again though, the NZD has held up better than most. Broad-based overnight gains in commodity prices likely contributing to the NZD’s resilience.
Looking ahead, as a ’risk sensitive’ currency, the NZD/USD will continue to dance to the beat of European dramas. The likelihood of further EUR/USD losses will be a drag on the kiwi.
However, NZD/EUR demand, rising commodity prices, and supportive domestic fundamentals will all act to limit the downside and ensure the NZD outperforms on the crosses. Notably, at 77.02, the NZ TWI is now within spitting distance of February’s 77.25 post-float highs.
For today, NZD/USD support will be found on any dips towards 0.8325 with resistance at 0.8400 likely to contain any bounces.
NZ building permits figures at 10:45am (NZT) are expected to show another rebound (market +3%) but Europe will dominate the newswires over the Easter break. We’ll pick up the pieces when the BNZ daily returns on 2 April. Happy Easter.
---------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
Risk aversion and EUR selling remain the dominant themes in currency markets. The EUR/USD slumped to a fresh 4-month low below 1.2760 overnight as the ‘safe haven’ USD and JPY outperformed.
Investors looking for reasons to short the EUR and euro assets were simply spoilt for choice.
Cyprus released details of the capital controls it will use to manage the reopening of its banks tonight, further unnerving those that believe Cyprus could become a template for dealing with European banking crises.
Attempts by Bersani to form an Italian government came to nothing (quote: only an “insane person” would want to govern), and an Italian government bond auction went very badly (lowest bid-cover ratio in over a decade).
Meanwhile, Eurozone economic confidence, unsurprisingly, was revealed to have gone backwards in March (90.0 from 91.1, 90.5 expected).
Renewed worries about the health of the Eurozone saw European equity markets slide 0.9-1.2% amid a general widening in peripheral sovereign bond spreads and a sharp (7bps) decline in 10-year German bund yields.
The negative sentiment eased off a touch through the New York session – the S&P500 is currently down 0.3% after opening down 0.7% – but the EUR/USD nevertheless remains around its 1.2760/70 overnight lows.
The general backdrop of risk aversion and equity market weakness also knocked the top of the GBP, NZD, AUD, and CAD. But the fallout outside of the EUR and EUR assets continues to be modest.
This likely reflects investors’ view that we are dealing with a European specific shock that will not derail the broader global recovery. Indicative of such, the CRB commodity price index rose 0.5% overnight, to be up 1.2% for the week.
Looking ahead, the growing likelihood a second Italian election will be called, speculation of ECB rate cuts, and the ongoing deterioration in French and Italian data means additional EUR downside looks compelling.
A convincing break of 1.2670 support would bring into view a possible slide back to 1.2400.
Other News:
*Final UK GDP figures revealed the UK economy contracted by 0.3% in Q4, in line with earlier estimates.
*Fed’s Kocherlakota (born again dove) says “monetary policy is currently not accommodative enough”.
*US pending home sales fall -0.4%m/m in February (-0.3% expected), bringing y/y growth to 5% from 8.7%.
*Moody's says the EU's awkward handling of Cyprus's bailout has put extra pressure on European sovereign ratings.
Event Calendar:
28 March: NZ building permits; AU credit; NZ credit; EU German unemployment;
29 March: Good Friday holiday; US Michigan consumer confidence.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.