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Risk rally benefits NZD as Russia implies it has no interest in Ukrainian territory beyond Crimea; NZD now directly tradeable against Chinese Yuan

Currencies
Risk rally benefits NZD as Russia implies it has no interest in Ukrainian territory beyond Crimea; NZD now directly tradeable against Chinese Yuan

by Raiko Shareef

NZ Dollar

The NZD has been the main beneficiary from a risk rally stemming from Russia’s indication that it does not intend on claiming further territory in Ukraine.

The NZD/USD is up 0.8% to 0.8630, its highest level since April 2013 (where the high was 0.8676). Strong gains were also seen against the EUR and the GBP, taking the NZ TWI to a new post-float high of 80.50.

News that the NZD can now be traded directly against the CNY may have boosted sentiment toward the currency. The announcement was made during Prime Minister John Key’s visit to China, and makes the NZD the fourth currency to be directly tradable against the yuan (after the USD, JPY, and AUD).

This morning’s GlobalDairyTrade auction seems to have had little impact on the NZD, despite a 5.2% fall in prices since the previous auction. This knocks the GlobalDairyTrade price out of the tight 5.5% range it has held since mid-July, and possibly signals the start of a general trend lowed in dairy prices. We expect NZ’s commodity prices to fall modestly through this year, to the tune of about 10%. This should help moderate NZD strength.

Locally, NZ has current account data for Q4 2013 due for release. We expect the current account deficit to narrow from 4.1% to 3.3% of GDP, as the stimulus from high export prices feeds through into the balance of payments. We expect continued narrowing of the deficit through to the middle of 2014.

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Majors

Risk assets gained overnight, as Russia implied that it had no interest in Ukrainian territory beyond Crimea. US and European equities rallied, gold lost some of its safe-haven lustre, and emerging market currencies are generally stronger against the USD.

Russia President Vladimir Putin formally claimed Crimea as part of Russia last night, signing a treaty with Crimean leaders. While the treaty needs parliamentary approval, that is largely considered a formality.

More relevant for markets, however, were Putin’s comments that “Russia does not want division of Ukraine”, which were interpreted to mean that Russia would not make moves to claim fresh territory. Risk assets benefitted, with the Euro Stoxx 50 up 0.8% and safe-haven gold down 1.0% for the day.

Putin praised Ukraine’s military for its restraint through this three-week period. But shortly after his remarks, a Ukrainian military facility was stormed by Russia troops, and a Ukrainian soldier was fatally wounded. This morning, Ukrainian defence officials announced that they have authorised the use of live ammunition in Crimea. Given the care taken so far, we suspect this was a one-off incident, but we remain wary of escalation on this front.

Oddly, some currencies appear not to have bought into the general risk rally. The EUR spiked higher on the headlines, but later retraced much of that move, with EUR/USD 0.1% weaker for the session at 1.3930. The JPY failed to experience weakness that one would have expected, and is 0.4% stronger against the USD at 101.40.

In Australia, the RBA minutes showed that Board members were comfortable with the current (neutral) policy setting. That said, they expect the labour market to remain weak for some time, and also see the current level of the AUD as high. All in all, little new news from the policy statement earlier this month. AUD/USD has strengthened with this risk rally, rising 0.4% to 0.9130.

Tonight sees the main schedule event for the week, the Fed policy meeting. Another $10bn taper is expected, but markets will be more concerned about if and how the FOMC adjust forward guidance, given that the unemployment rate has fallen faster than anticipated.

The Bank of England minutes and the UK’s Budget may also attract some interest.

Other news:

*German ZEW expectations survey 46.6 vs 52.0 exp.

*US CPI 1.1% y/y vs 1.2% exp.

*US housing starts 907k vs 910k exp.

*US building permits 1018k vs 960k exp.

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Source: CoinDesk

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