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Opinion: NZ$ firms on bolstered risk appetites after new Greek bailout

Opinion: NZ$ firms on bolstered risk appetites after new Greek bailout

By Mike Jones The NZD was the strongest performing currency on Friday night. As a result, NZD/USD finished the week around 0.7150, having started out closer to 0.7050. Having drifted lower through the Easter break, the NZD/USD spent the early part of last week trapped in an all too familiar 0.6970-0.7100 range. The Greek debt crisis deteriorated noticeably last week. Greek borrowing costs soared to all time highs amid rumours Greek banks were suffering from a mass deposit withdrawal. European stocks, the EUR/USD, and risk appetite all suffered as a result. For the NZD, this meant the currency was caught between deteriorating risk appetite on the one hand, and surging commodity prices on the other. Average whole milk powder prices rose a whopping 21% (to US$3,969/tonne) at last week’s Fonterra online auction, which had the effect of limiting NZD/USD dips to 0.6960. On Friday, market sentiment was cheered by rumours a new, improved rescue package for Greece was in the pipeline. European equities jumped 1.0-1.8% in anticipation of such and appetite for risk rebounded. Not even Fitch’s downgrade of Greece (to BBB- from BBB+) disrupted markets’ buoyant mood. Our index of risk appetite (which has a scale of 0-100%) jumped to 74.2%, from 73.9%. Against this backdrop, investors shunned the ‘safe-haven’ appeal of the USD and JPY and dived back into ‘risk-sensitive’ currencies like the NZD. NZD/JPY rose from 66.00 to almost 66.90, NZD/EUR reached fresh 25-month highs around 0.5330, and NZD/USD was pitched to 3 week highs above 0.7150. Looking ahead, we suspect the NZD will remain perky this week. European leaders indeed appear to have agreed on a new support package for Greece over the weekend, and this is likely to keep risk appetite well supported early in the week. Eurozone countries and the IMF will fork out €60b worth of loans for Greece. Crucially, these loans will be provided at below-market interest rates. Household indicators are the main thread to the coming NZ data week. February retail sales, March electronic transactions data and REINZ housing data will all provide important tests of the pulse of NZ consumer spending in Q1. Absent any disappointing results from this week’s data, we suspect dips in NZD/USD will be limited to 0.7050 this week. And if we see a daily close above 0.7180 we wouldn’t rule out a gallop towards the 0.7250 region. This is certainly the message from our short-term NZD/USD valuation model, which still suggests NZD/USD is “cheap” below 0.7300. The USD weakened against all of the major currencies on Friday night. Risk appetite was bolstered by some upbeat data and easing fears about the plight of Greece. A Medley article suggested a fresh EU-IMF support package for Greece had been agreed upon, with an unnamed EU source backing up these sentiments. Against this backdrop, Fitch’s downgrade of Greece (to BBB- from BBB+) was largely shrugged off. Meantime, UK PPI output prices rose at the fastest pace in 16 months in March (0.9%m/m vs. 0.4% expected) reminding investors UK interest rates will have to rise at some point. The VIX index (a measure of risk aversion based on the volatility of the S&P500) dropped to near 22-month lows around 16%. European equities bounced 1.0-1.8% and the Dow Jones rose above 11,000 for the first time in 18-months. Reflecting the buoyant sentiment, investors trimmed positions in “safe-haven” currencies like JPY and USD. EUR led the squeeze higher in the major currencies, given speculative investors are still heavily ‘short’ EUR/USD. In fact, EUR/USD recovered nearly 1½ cents, from 1.3360 to almost 1.3500. GBP/USD happily joined the fray given the stronger UK data, reaching a 1½ month high close to 1.5380. Friday night’s optimism looks to have been warranted. European leaders agreed on Sunday evening to offer Greece a rescue package worth €45b, with the IMF stumping up a further €15b. What’s more, the loans will be offered at interest rates around 5% (for 3 years), about 300bps below current Greek borrowing costs. It’s worth noting that Greece hasn’t actually asked anyone for help yet. But given the attractiveness of last night’s offer, the package is likely to be difficult to refuse – particularly with Greek borrowing costs blowing out to new highs last week. We suspect the sweetened rescue deal will keep risk appetite and stocks well supported early in the week, with the USD likely to trade a little heavily as a result. A further paring of EUR shorts may see EUR/USD test resistance towards 1.3650 at some point. Besides Greece, markets’ other major focus this week is likely to be on possible changes to China’s Yuan policy (this week’s data developments are fairly low key). Speculation of a Yuan revaluation saw other Asian currencies such as MYR, INR, and KRW all surge higher last week following a New York Times article suggesting a relaxation of the Yuan’s USD peg is likely soon. However, Saturday’s disappointing Chinese trade balance data for March (US$-7.24b vs. US$-0.39b expected) will add further ammunition to Chinese calls to resist Yuan appreciation. *All of the research produced by the BNZ Capital team of economists is available here

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