Opinion: NZ$ firm for now on easing Greek debt fears, but worries remain on China and Euro

By Danica Hampton The NZD/USD has staged a bit of a recovery over the past 24 hours. After falling below 0.6820 yesterday morning, NZD/USD managed to push above 0.6950 last night. Once again, debt issues in Greece stole the limelight. However, instead of imposing doom and gloom, investors were cheered by media reports suggesting European policymakers had made an "in principle" decision to rescue Greece from its debt troubles. Investors hope that official assistance for Greece will help stop the debt crisis from spreading elsewhere in the world. While European equities were flattish, Wall Street has rebounded strongly. The S&P500 is currently up 1.6%. Against a backdrop of strong equities and improving risk appetite, the USD was sold heavily as investors trimmed back safe-haven positions. EUR/USD spiked sharply from sub-1.3700 to nearly 1.3840. While the generally weaker USD helped NZD/USD grind higher last night, the fresh 5-month lows also encouraged a bit of demand from a wide variety of local real-money accounts. John Key didn't give us a lot of new information in yesterday's annual statement to Parliament. A land-tax was ruled out, but it was otherwise just a general update on the National Party's thinking on tax. There wasn't much in the way of specifics, but it will be important to watch this space as material policy changes may be in the offing in May's Budget. Global sentiment will remain key to the near-term fortunes of the NZD. For today, the backdrop of firm equities and recovering risk appetite should ensure dips in NZD/USD are limited to 0.6880. Some headwinds are expected ahead of 0.6990-0.7000. Keep an eye out for today's electronic card spending, as it will provide a valuable update on the pulse on domestic spending in January. The USD fell sharply against most major currencies last night, as easing fears about Europe's debt woes helped risk appetite. Investor sentiment was cheered by media reports suggesting Eurozone policymakers have made an "in principle" decision to help debt stricken Greece. While vague rumours of a €20b rescue package swirled around markets, there was no detail on what support Greece may need and it what form it will be provided. After the news, the spread between 10-year Greek and German government bond yields narrowed 38bps to 313bps. And the cost of insuring Greece debt eased (1-year sovereign CDS spreads fell by about 46bps to 634bps). By Danica Hampton Investors are hopeful that official assistance for Greece will help stop the debt crisis from spreading across other countries. While European equities were flattish (FTSE flat and FAX dropped 0.18%), Wall Street has rebounded strongly. The S&P500 is currently up 1.6%. The improving global backdrop saw the USD sold heavily as investors exited "safe-haven" positions. EUR/USD jumped sharply from below 1.3700 to around 1.3840 and GBP/USD spiked from sub-1.5600 to nearly 1.5750. Reuters later reported that a German government official said the decision on aid for Greece was unfounded. While this saw EUR/USD knocked off its highs, it failed to dent sentiment significantly and Wall Street extended its gains. In other news "“ bad weather has led to the postponement of Bernanke's semi-annual testimony, ratings agency Fitch noted that the UK the economy is most at risk of losing its triple-A rating and the Swiss National Bank's Jordan spoke on preventing excessive CHF appreciation. Investors are hopeful that Thursday's EU Leaders Summit (which front-runs next week's EU Finance Ministers meeting) may help shed a bit more light on how policymakers are planning to tackle Greece's escalating debt crisis. Europe's fiscal woes are likely to remain the key focus for EUR near-term. However, EUR/USD seems to have formed a base above last week's 1.3580 low and we suspect a bit of consolidation is in order near-term. Keep an eye out for today's Chinese data, which includes exports, imports and new loans. China's efforts to curb lending have made investors jittery over the past few weeks and elevated readings from this week's data may well prompt further action from the PBOC. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.