Opinion: NZ$ firms along with A$ as talk of RBA rate hike in March strengthens

By Mike Jones The NZD/USD has staged a bit of a recovery over the past 24 hours. Having started the week around 0.6950, NZD/USD managed to push above 0.7050 last night. Market sentiment received a clear lift following the release of the EU's plan to sort out Greece's fiscal woes. While an explicit bailout was largely ruled out, some EU support for Greece may yet be in the offing should it fail to make progress on slashing its deficit by the March 16 deadline. The absence of more bad news on Greece, combined with some upbeat global data, saw risk appetite improve and equity markets post solid gains overnight. Both the US empire manufacturing survey and the German ZEW survey outstripped market expectations by a clear margin, buoying optimism about the global recovery. Global equity indices posted gains of 1-1.5%. Meanwhile, our index of risk appetite (which has a scale of 0-100%) increased to 53.5%, from 52.8% at the start of the week. Improving risk appetite saw growth-sensitive currencies outperform last night. In contrast, safe-haven currencies like USD and JPY were sold across the board as fears over the global outlook eased. NZD/JPY surged nearly 1.5% to 63.80, and this helped drag NZD/USD above 0.7050. The NZD also received some support from gains in the AUD, following a hawkish article from noted RBA watcher Terry McCrann. McCrann suggested a March RBA rate hike is more or less a done deal and the RBA will raise rates a further 100-200bps over the rest of the year. Still, the AUD/USD outperformed and NZD/AUD slipped back to around 0.7830. Looking ahead, we suspect NZD/AUD will test the bottom end of its recent 0.7800-0.8100 range. Dairy prices are showing signs of peaking at a time when Australian commodity prices are forecast to rise another 15% this year. Australian markets also look to be underpricing the chances of near-term RBA tightening, while the rally in NZ interest rate markets may have further to run. As such, we suspect NZD/AUD will test support towards 0.7790 in coming weeks. The USD weakened against most of the major currencies overnight as easing fears about Greece saw risk appetite improve. Market sentiment was cheered by further details on how the EU plans to help Greece through its fiscal crisis. EU finance ministers stopped short of providing explicit support for Greece, preferring instead to lob the ball back into Greece's court. Greece will be given 30 days to prove itself capable of slashing its deficit. It will also have to report back again in mid-May and every three months thereafter. But the possibility of support from the EU remains on the cards, should Greece run into further difficulties. While hardly the silver bullet some were hoping for, the announcements did pave the way for a stabilisation in sovereign debt concerns. Greek sovereign CDS spreads were broadly unchanged at around 500bps. Easing fears over Greece bolstered investors' risk appetite and helped global stock markets recover. European bourses rose around 1.5%, while the S&P500 is currently up 1.3%. The VIX index (an index of S&P500 implied volatility used as a proxy for risk aversion) fell to 22.5%, from nearly 23.5%. Upbeat global data added to the positive sentiment. The February German ZEW survey of economic sentiment fell by less than expected (45.1 vs. 41.0 expected), while the US empire manufacturing survey soared to 24.9, against expectations for a steady 18.0. Against a backdrop of recovering risk appetite and increased optimism about the global recovery, investors pared "˜safe-haven' positions in the USD and JPY and dived back into "˜growth-sensitive' currencies. Sentiment towards the USD wasn't helped by comments from Kansas City Fed President Hoenig who said large fiscal deficits will increase pressure on the Fed to keep interest rates lower for longer. EUR/USD spiked more than a cent from 1.3650 to above 1.3750, USD/CAD slipped from nearly 1.05 to 1.0420, and AUD/USD poked its head back above 0.9000. Gains in GBP were a little more subdued, amid slightly softer than expected January inflation data (-0.2%m/m vs. -0.1% expected). Looking ahead, tonight's Bank of England minutes will show how contentious the decision to end QE was in February. January US housing market data is also due for release. Overall, we suspect the current environment of improving risk appetite will keep the USD a little heavy in the short-term. Bounces towards 80.40 on the USD index are expected to encounter resistance, while near-term support is eyed towards 78.90. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.