Opinion: Why the NZ$ is headed for 56 Euro cents as Greece woes deepen

By Mike Jones The NZD has been the strongest performing currency overnight. Despite rising risk aversion and a firmer USD, the NZD/USD managed to hold its ground around 0.7100. In a broad sense, familiar themes prevailed in currency markets overnight. That is, further evidence of improvement in the global backdrop, but with concerns about Greece tempering investors’ optimism somewhat. Global growth-sensitive currencies like the NZD found support from a string of upbeat data releases. US existing home sales bounced by more than expected in March, the Eurozone manufacturing PMI continued to surge ahead, and UK public finance figures were not quite as bad as some had expected. Optimism about the strength of global demand helped commodity prices post modest gains (the CRB index rose 0.2%), even as equity markets were flat to down slightly. Still, NZD/USD gains were once again limited to the 0.7140 region as concerns about Greece’s fiscal crisis prompted a paring of risk appetite, encouraging demand for “safe-haven” currencies like the USD. Not only was Greece’s 2009 budget deficit revised higher, but Moody’s downgraded Greece’s sovereign rating (to A3 from A2). As a result, Greek borrowing costs surged to all-time highs and EUR/USD slumped to 11-month lows around 1.3260. Against this backdrop, NZD/EUR climbed to fresh 26-month highs above 0.5340. We suspect the downtrend in EUR has further to run and NZD/EUR will be closer to 0.5600 by the end of the year. For NZD/USD, we suspect a bit more range trading is in the offing in the short-term. In the absence of another bout of risk aversion, dips in NZD/USD are expected to be limited to 0.7000 in coming weeks. But for a push through 0.7200, we’ll need to see some commitment from the RBNZ that interest rate hikes are on the way. So stay tuned for the RBNZ’s OCR review next week. Today, the focus for the NZD/USD will likely remain offshore, but keep an eye out for this morning’s credit card billings and migration data for March. Initial support on is eyed towards 0.7070. The USD strengthened against most of the major currencies last night. Not only did the USD benefit from increased “safe-haven” demand, but optimism about the strength of the US economy added to the USD’s appeal. Despite some fairly solid European data (the Eurozone manufacturing PMI rose to 57.3, exceeding expectations), EUR/USD again succumbed to concerns about Greece’s solvency. Not only did Moody’s downgrade Greece’s sovereign rating (to A3 from A2), but a German government lawmaker said Greece should be prepared to leave the Eurozone if it can’t trim back its deficit enough. Eurostat also revised Greece's 2009 budget deficit to 13.6% of GDP from 12.7%. Greek 10-year sovereign bond spreads blew out to nearly 580bps above German Bunds (from 500bps yesterday) and EUR/USD was sold down to fresh 11-month lows around 1.3260. The escalating crisis in Greece, and some fairly lacklustre earnings reports provided some headwinds for equity markets. European stocks fell around 1%, while US stocks are currently about flat. A speech from US President Obama hinting at tighter regulation for banks also likely weighed on stocks and risk appetite. Against this backdrop, both the USD and JPY found support from increased “safe-haven” demand. Offsetting gains in the JPY, ratings agency Fitch said Japan’s creditworthiness was at risk from rising sovereign debt. As a result, USD/JPY finished the night around 93.30, having started out below 93.00. Renewed optimism about the strength of the US economy added to the USD’s appeal. US existing home sales for March rose by a bit more than expected (6.8%m/m vs. 5.3%), while both March producer prices and April jobless claims were broadly in line with analyst expectations. US 10-year and 2-year bond yields both ticked up around 5bps in the wake of the data. For the GBP, better-than-expected March figures on public borrowing (£23.5b vs. £24b expected) allayed some of the markets’ fears about the UK’s rising debt levels. EUR/GBP continued to trend lower, falling to 0.8650, while the rising USD capped GBP/USD gains to 1.5460. Looking ahead, tonight’s data is all about quality, not quantity – US durable goods orders, the German IFO and Q1 UK GDP are all due for release. The G20 finance ministers and central bankers meeting will also occupy markets’ attention. Still, we suspect sovereign solvency concerns will remain the key driver of EUR for now. In the absence of Greece actually activating the IMF-EU rescue package, we suspect EUR/USD bounces will be limited to 1.3430 in the short-term. *All of the research produced by the BNZ Capital team of economists is available here