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Opinion: Risk NZ$ could fall to 75.5 Aussie cents if RBNZ delays rate hike

Opinion: Risk NZ$ could fall to 75.5 Aussie cents if RBNZ delays rate hike

By Mike Jones The NZD/USD has spent the last 24 hours trading choppily within a 0.7080-0.7140 range. The NZD was sidelined for most of the night, as markets’ focus remained firmly in Europe and the escalating Greek fiscal crisis. As meetings between the IMF and Greece got underway, Greek bond spreads soared to all-time highs above 500bps over 10-year German government bonds. In all likelihood, this means Greece will have to take the aid package offered by the Eurozone and IMF. Worries about Greece’s sovereign solvency cast a shadow over equity markets, which had otherwise been bolstered by upbeat US earnings announcements (from Apple and Morgan Stanley) and positive UK economic data. European equity markets fell 0.5-1.2%, while the S&P500 is down around 0.4%. The associated paring of risk appetite tended to weigh on the NZD, as investors increased exposures to “safe-haven” currencies like the USD and JPY. As a result, the NZD/USD pared some early gains and dribbled off to around 0.7100. NZD/AUD spent the night in consolidation mode after the steep losses suffered on Tuesday. Over the next few weeks, we suspect the balance of risks are skewed towards a retest of April 6’s 0.7555 low in NZD/AUD. Our new short-term valuation model suggests a short-term “fair-value” range for NZD/AUD of 0.7550-0.7750, suggesting room for further downside. In addition, there are clear downside risks to NZD/AUD from a) the RBNZ delaying its first tightening until July, and b) an RBA rate hike in May – which looks under priced by the market. A realisation of these risks would see NZ-AU 3-year swap spreads fall further from current 15-year lows around -95bps. We wouldn’t be surprised if today’s ANZ-Roy Morgan consumer confidence index edged a tad lower from the 121.8 recorded last month. Still, we suspect a massive surprise, one way or the other, would be needed to shake the NZD/USD out of its recent 0.7080-0.7150 range. Watch out for a daily close below 0.7080. This would suggest a deeper correction towards 0.6960 is on the cards. Majors The USD firmed against most of the major currencies overnight as persistent worries about Greece spurred increased demand for “safe-haven” assets. Still, last night’s movements were lacking in any real conviction, and currencies once again tracked relatively tight ranges. Greek-German 10-year government bond spreads blew out to fresh highs above 500bps last night, amid warnings from the IMF that Greece’s troubles could spill over into other troubled European sovereigns. Markets appear to increasingly believe Greece will default on its sovereign debt, even as talks get underway between the EU and the IMF to sort out Greece’s rescue package. For equity markets, worries about European sovereign solvency tended to overshadow strong US earnings reports and the positive lead from Asian stocks, such that most global indices ended the night in the red. The EuroStoxx 50 fell 1.2%, while the S&P500 is currently down around 0.5%. Both Apple and Morgan Stanley reported better-than-expected Q1 earnings overnight; in fact, 83% of all S&P500 companies (106 of 500) that have reported to date have positively surprised. Fears over the health of European sovereigns and equity market losses prompted renewed demand for “safe-haven” assets. Both the USD and JPY strengthened, while US 10-year Treasury yields slipped 6bps to 3.74% The firmer USD capped the AUD/USD’s strong run, sending the currency skidding to 0.9260, from almost 0.9340. Meanwhile, Greece’s troubles continue to take a heavy toll on EUR. EUR/USD fell from above 1.3400 to nearly 1.3360 before rebounding slightly. We remain downbeat on the EUR’s short-term prospects. European growth looks set to be anaemic this year and sovereign solvency issues are likely to linger. A re-test of March’s 1.3270 lows looks likely in coming sessions. GBP managed to buck the stronger USD trend. The Bank of England MPC minutes from the April meeting were fairly bland. The MPC voted 9-0 in favour of keeping rates on hold at 0.5% and asset purchases steady at £200b. However, UK jobless claims data were notably upbeat, falling 32,900 in March – more than three times the -10,000 expected. This adds to what has been a generally improving tone of recent UK data, including yesterday’s stronger-than-expected CPI figures for March. Renewed optimism about the UK’s economic prospects saw GBP/USD climb above 1.5400 last night to be almost 4.5% above its end-March lows. With the contrast to the European growth outlook increasingly obvious, EUR/GBP tumbled to 2-month lows around 0.8690. *All of the research produced by the BNZ Capital team of economists is available here

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