Opinion: NZ$ rumbles sideways on Chinese squeeze, Goldman case ahead of CPI

By Mike Jones The NZD/USD held its ground overnight, despite broad-based gains in the USD. Overall, NZD/USD has spent the last 24 hours tracking a sideways 0.7050-0.7110 range. A rising tide of risk aversion kept demand for “growth-sensitive” currencies like the NZD subdued overnight. Following the fraud charges laid against Goldman Sachs on Friday, markets are now a little wary of cases being brought against other banks. At the same time, the Icelandic volcano eruption has spurred fears about the European outlook, with more than 300 airports still closed and several large European manufacturers talking about halting production. European equities dipped around 0.3%, while US stocks were broadly flat. At 70.2%, our index of risk appetite (which has a scale of 0-100%) remains well down on last week’s highs of nearly 77%. Heightened fears about the global backdrop increased the “safe-haven” allure of the USD, which strengthened against nearly all of the major currencies overnight. Still, dips in NZD/USD were limited to around 0.7060, with both commercial and real money accounts noted as keen buyers of NZD/USD. Modest gains in NZD/AUD also helped shore up sentiment towards NZD/USD. News of further measures designed to crimp Chinese credit growth took a toll on AUD/USD. As a result, NZD/AUD has climbed from below 0.7660 to nearly 0.7700. For today, all eyes will be on the March CPI at 10:45am. We are picking a 0.6% increase in the headline index which would take annual inflation to 2.3% – the highest since March 2009. While our view matches the market consensus, it is significantly above the RBNZ’s 0.3% forecast. From this perspective, a number such as we are forecasting may well tilt the risks a bit more in favour of a June RBNZ hike, rather than July, providing supporting to the NZD. Still, we suspect any post-CPI rally in NZD/USD would be limited to 0.7150 in the short-term given the more cautious attitude towards ‘risky’ assets such as the NZD. The USD continued to strengthen against the major currencies last night as rising risk aversion spurred demand for “safe-haven” assets. With almost no data to watch for, currency markets again took their cues from equity markets. Most global equity indices posted their second straight day of losses, underpinning demand for “safe-haven” currencies like the USD and JPY. In Europe, the major stock indices recorded declines of 0.3-1.0%, while US stocks were flattish. Reflecting renewed worries about the global backdrop, the VIX Index (an indicator of investors’ risk aversion) held up at 1½ month highs around 19%. The effects of Friday’s filing of fraud charges against Goldman Sachs continued to ripple through markets, keeping investors cautious. Not only are rumours beginning to surface that additional banks could be charged, but ratings agency S&P said “reputational damage” could hurt Goldmans’ rating. Goldman Sachs stocks fell a further 1.4% on top of Friday’s 13% plunge. In addition, markets have started to fret about what the fallout from Icelandic volcano eruption means for the European economic recovery. Some 63,000 flights have now been cancelled and more than 300 European airports remain closed. The International Air Transport Association warned the economic impact of the eruption would be worse than the September 11 2001 terror attacks. Fears about reduced global demand, as well as rising risk aversion, have seen oil prices fall 4.7% over the past two days. Not surprisingly, this has taken a heavy toll on CAD. USD/CAD has surged over 2% from last week’s 0.9950 low. The ash cloud even forced the postponement of the IMF meeting to discuss Greece’s rescue package, prolonging the uncertainty over Greece’s plight. Greek 10-year bond spreads widened to a fresh record high of 455bps over German Bunds last night, amid comments from Eurogroup Chairman Juncker Greece could face new, tougher austerity measures. Combined with the firmer USD, this saw EUR/USD fall from above 1.3450 to around 1.3420. In a similar vein, GBP/USD slipped below 1.5300 as election polls indicate a growing risk of a hung parliament in the UK. In the near-term we expect “safe-haven” currencies like USD and JPY to continue to benefit from heightened risk aversion and equity market wobbles. However, if some of the heavy-hitting data due later in the week (German IFO, EU PMIs, US home sales, UK retail sales and Q1 GDP) supports the 2010 global recovery story, we’d expect sentiment towards “growth-sensitive” currencies to recover somewhat. *All of the research produced by the BNZ Capital team of economists is available here