Opinion: Kiwi$ slips on Greece after early overnight gain
29th Jan 10, 9:39am
By Mike Jones It's been a bumpy ride for the NZD over the past 24 hours. After climbing to nearly 0.7140 overnight, NZD/USD has slipped back to 0.7060 "“ pretty much where it was this time yesterday. Yesterday's OCR review was admirably boring and commendably short. As widely expected, Governor Alan Bollard stuck fast to December's script (while keeping the OCR at 2.50%, for the record). So, provided the economic recovery continues to gather pace, the RBNZ will probably start budging its cash rate up around mid-year. This certainly remains our core view on the economy, and RBNZ policy. With the statement more or less bang in line with market expectations, there was precious little NZD reaction to speak of. And 2-year swap rates ticked up barely 2bps. The NZD/USD got off to a pretty good start last night. While markets took yesterday's FOMC statement in their stride, equity markets and "˜growth-sensitive' currencies like the NZD found support from US President Obama's State of the Union address. In particular, the lack of any further measures to curb bank risk taking. But highs around 0.7140 in NZD/USD didn't last for long. Heightened concerns over European sovereign solvency and uninspiring US data knocked equity markets for six and risk appetite was pared back accordingly. Moody's said Portugal is at risk of a ratings downgrade, Germany and France rejected speculation of a bail out for Greece, and S&P said the UK's banking system is no longer among the world's most stable. As a result, investors ditched the NZD in favour of "˜safe-haven' currencies like USD and JPY and NZD/USD slid back to around 0.7060. While worries about the global outlook have kept the NZD/USD fragile over the past few weeks, we expect dips in NZD/USD below 0.7000 to be short-lived. Certainly while investors remain convinced the outlook for NZ growth in 2010 is more promising than our trading partners. For today, initial support is seen towards 0.7020. December building permits and trade data are due for release this morning (10:45am). Also keep an eye out also for headlines from RBNZ Governor Bollard's midday speech entitled "Lessons from the Crisis". It's been a pretty frenetic 24 hours in currency markets. The upshot is that a further paring in risk appetite has seen the USD post modest gains against most of the major currencies. Yesterday's FOMC meeting passed without too much fanfare. As expected, the Fed upgraded its economic outlook but again cautioned that low levels of the Fed Funds rate will be required for an "extended period". A surprise dissention by Hoenig to the use of the "extended period" phrase offered some fleeting support for the USD. Equity markets initially took heart from Obama's State of the Union address yesterday afternoon. Specifically, Obama's comment he is "not interested in punishing banks" and the lack of any further measures to crack down on bank risk-taking. In the wake of the address, risk appetite improved and "˜growth-sensitive' currencies like EUR, AUD, and NZD started the night on a firm footing. However, the second part of the night was characterised by a sharp reduction in risk appetite, which saw investors flock back into "˜safe-haven' currencies like JPY and USD. Concerns escalated over the solvency of several European sovereigns. Greece said it had not struck a deal to sell bonds to Chinese investors, and will instead seek buyers in Europe. Meanwhile, both Germany and France denied media reports they were preparing a rescue package for Greece, and ratings agency Moody's said a "credible plan" to reduce Portugal's budget deficit will be needed to prevent a ratings downgrade. Greek bond spreads over German Bunds rose to 405bps "“ the highest level since the euro was introduced. With risk appetite retreating, equity markets were pummelled and "˜growth-sensitive' currencies pared earlier gains. Economic data released last night didn't really help matters. While Eurozone economic confidence improved, US durable goods orders and the Chicago Fed activity index both undershot expectations. The S&P500 is down nearly 1.3%, while the DAX and the FTSE fell 1.8% and 1.4% respectively. Not surprisingly, EUR tended to be hit hardest by last night's news; EUR/USD fell to 6-month lows around 1.3950. GBP was knocked back following Standard & Poor's comment the UK banking system was no longer among the most stable and low-risk banking systems. Having pushed up to around 1.6260 early in the night, GBP/USD subsequently slid back to nearly 1.6120. For today, we suspect the global backdrop of deteriorating risk appetite and financial system concerns will keep the USD index supported on dips towards 78.30. Keep an eye out for the expected confirmation of Fed chief Bernanke's reappointment. Any doubts about his reappointment could further dent investors' risk appetite. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.