No progress over Ukraine; if anything things are worsening. Risk aversion rising ahead of sanctions

by Raiko Shareef

NZ Dollar

The NZD was a touch softer on Friday, as muted risk sentiment pervaded. The NZD/USD ended the week at 0.8530.

NZ’s BNZ-Business NZ PMI failed to spark any rally, despite another strong reading of 56.2. This remains close to the record high, and points to gathering momentum in the NZ economy.

The NZD will start the week with a negative bias, as results from Crimea’s weekend referendum and the international response emerge.

The NZD/USD remains lofty, following the RBNZ’s more-hawkish rate track on Thursday.

We see resistance at 0.8605, and short-term support around 0.8450.

Locally, the focus this week will be on NZ’s Q4 GDP print for 2013, due Thursday. BNZ is picking a 0.8% q/q increase, which would be a terrific result following Q3’s out-sized 1.4% gain.

That said, the balance of risks is towards the topside.

Also, we will be closely watching Wednesday morning’s Global Dairy Trade auction. The 4% fall at the previous auction puts prices at the very bottom of the tight range they have held since mid-2013.

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Majors

The JPY continued to gain on Friday, as investors eyed Crimea’s referendum, which is due to close at 7am NZT this morning. Markets will open this morning with a risk-negative tone.

By now, it is likely that Crimean citizens have voted to secede to Russia. News reports suggest that the result is a foregone conclusion, with many of those opposed to the referendum choosing to stay home, unwilling to take part in what they see as a rigged vote. The region’s authorities seem fairly confident – Crimea’s deputy premier was on the wires this morning, saying that Crimea will switch to using the Russian ruble on 1 April.

For markets, the real concern is the impact of sanctions placed on Russia by Western nations, and any retaliatory actions Russia might take. There appears to have been no progress made on a diplomatic solution to the crisis.

If anything, conditions are worsening. On Saturday, Russian troops seized a natural gas terminal beyond the borders of Crimea.

The JPY has continued to benefit from a safe-haven bid, gaining 0.5% over Friday, after a 0.9% gain on Thursday. It opens this morning at 101.4. Major equity indices were generally lower.

Separately, over the weekend, China announced that the CNY will be allowed to trade within an expanded +/-2% trading band. The band was last widened to +/-1% from 0.5% in April 2012 and from 0.3% to 0.5% in May 2007. The move has been widely expected since February’s CNY volatility.

This week, the focus will be on Janet Yellen’s first policy meeting as Fed Chair (Wed). A further US$10bn taper is expected, taking asset purchases to US$55bn per month. Yellen will likely continue to drum home that tapering is not on a pre-set course, and remains data-dependent. In a relatively quiet data week, other highlights will include minutes from the latest meetings of the RBA and the Bank of England (due Tue and Wed respectively).

All its research is available here.