Opinion: Kiwi$ surges as Fonterra payout news looms; OCR decision nears

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. In fact, NZD/USD was propelled to 3-month highs of nearly 0.7250 overnight. On a trade-weighted basis, the NZD is the highest since October 2009. Aside from the surging NZD, it was a relatively subdued night in currency markets. The lack of any fresh news or data saw Greece’s debt crisis remain the focus for currency markets. In particular, fears Greece’s bailout could come with some nasty strings attached tempered investors’ risk appetite and saw EUR/USD resume its downward slide. The associated gains in the USD took the edge off most of the major currencies last night. But the NZD was singing from a different songbook. First, speculation is rife that Fonterra will raise the current season’s dairy payout this week. Upbeat comments from Fonterra that "significantly higher” dairy prices are likely over the next decade (compared to the past 10-years up to 2007) added to the positive mood. Second, speculative and leveraged-type accounts have become increasingly wary of holding ‘short’ NZD/AUD positions going into the RBNZ meeting on Thursday. A sharp squaring of these positions pitched NZD/AUD to 1½ month highs above 0.7800 overnight. Lastly, market chatter suggests the NZD has been in hot demand from so-called Toshin funds (Japanese investment trusts that invest in offshore assets) over the past 24 hours. Indeed, NZD/JPY spent the night flirting with year-to-date highs above 68.00. We suspect expectations of rising NZ yields will continue to encourage longer term Japanese investors to buy NZD assets in coming months. Looking ahead, we expect the NZD to remain well supported going into the RBNZ meeting on Thursday. But for today, profit-taking and last night’s paring of risk appetite may well limit NZD/USD rallies to the 0.7250 region. Keep an eye out for headlines from Fonterra’s Board meeting. Market reports suggest the meeting could take place as early as today. Currencies were a little directionless last night. But once again, concerns about Greece occupied most of markets’ attention, keeping EUR heavy and providing “safe-haven” support to the USD. Despite the activation of the EU-IMF rescue package on Friday, it seems Greece is far from home and hosed in relation to its debt refinancing difficulties. German Chancellor Merkel said last night Greece will have to commit to tough new savings measures before “Germany will help”, pricking fears the IMF and EU will impose hefty conditions on Greece in exchange for bailout money. Greek-German 10-year bond spreads blew out to fresh all time highs above 650bps. As a result, having recovered to almost 1.3400, EUR/USD tumbled back towards 1.3300. Not only did EUR weakness prop up the USD, but market chatter suggesting this week’s FOMC statement could be hawkish (and even drop the “extended period” clause) added support to the USD. Given Fed chairman Bernanke’s relative dovish Testimony before Congress, we suspect that this is idle speculation for now, but nervousness is likely to continue ahead of Thursday’s meeting. The Dallas Fed Manufacturing index, while second tier data at best, also underpinned optimism about the rapid US recovery. It jumped to 21.1% in April, from 7.2% in March, well above the 9.8% expected. Still, US equity markets took a bit of a breather overnight after last week’s strong gains. The S&P500 is down around 0.3%. Combined with the firmer USD and subdued risk appetite (the VIX index – a proxy for risk aversion – climbed to 17.2% from 16.4% last night) this saw AUD, CAD and CHF dribble lower. In contrast, GBP managed to buck the firmer USD trend after election polls showed a small increase in support for the Conservative party, reducing the risk of a hung parliament. GBP/USD ground up to almost 1.5480, while EUR/GBP fell to within a whisker of 8-month lows around 0.8600. Looking ahead, we suspect European sovereign solvency fears are likely to remain the focus for currency markets ahead of the FOMC’s policy announcement on Thursday morning (NZT). Not only are markets sceptical about the effectiveness of the Greek rescue package, but Portugal is likely to increasingly creep onto markets’ radar, given the large Portuguese debt maturity schedule in May. Against this backdrop, we expect bounces in EUR/USD to be limited this week. Near-term resistance is eyed towards 1.3420, and a re-test of Friday’s 1.3200 low looks likely in coming sessions. *All of the research produced by the BNZ Capital team of economists is available here