Opinion: Greek fears dominate overnight, but talk of yuan float helps Kiwi$

By Mike Jones It was a “V-shaped” sort of night for NZD/USD overnight. The net result is NZD/USD has opened this morning around 0.7070 – not too far from where we were this time yesterday. Yesterday’s Australian employment data provided another excuse for speculative and leveraged accounts to add to ‘short’ NZD/AUD positions. While the 19,600 jobs added in March was bang on what markets had expected, the data was widely seen as confirmation Australian unemployment has peaked and the RBA has further work to do in tightening monetary policy. As such, AUD/USD continued on its merry way north, dragging NZD/AUD back towards 0.7600. Our short-term valuation model suggests a “fair-value” range for NZD/AUD of 0.7600-0.7800. As such, we suspect any dips in NZD/AUD below 0.7600 will be short-lived in the near-term. Overnight, concerns about sovereign solvency reared their head again. Greek funding costs soared to record highs amid news several banks have cut repo lines to Greek banks. European equity markets dived 0.8-1.2% and our index of risk appetite (which has a scale of 0-100%) fell back to 73.4%, from 23-month highs around 75.3%. In response, EUR/USD dipped below 1.3300 and the JPY soared, as investors sought shelter in ‘safe-haven’ currencies. NZD/JPY slipped from 66.00 to 65.20, dragging NZD/USD towards 0.7020. However, the dip in NZD/USD was relatively short-lived. Soothing comments from ECB President Trichet that that "default is not an issue for Greece" shored up investor’s risk appetite. Speculation China may soon abandon the Yuan’s peg to the USD also supported demand for ‘growth-sensitive’ currencies like NZD and AUD, and NZD/USD soon recovered to a smidge below 0.7070. We suspect NZD/USD is in for a bit more range-trading in the near-term. Initial resistance is seen towards 0.7110, while support will be found on dips towards 0.7000. Majors Similar themes prevailed in currency markets last night. The first part of the night was all about risk aversion and a weaker EUR as worries about the Greek fiscal crisis escalated. Greek bond spreads widened to all time highs of almost 450bps over 10-year German bunds amid market chatter some American and European banks had cut funding lines to Greek banks. European equities tumbled. The German DAX fell 0.8%, while French CAC 40 slipped 1.2%. The VIX index (a proxy for risk aversion) spiked to nearly 17.8% from around 16.5%. Reflecting the gloomy sentiment, EUR/USD skidded below 1.3300 and JPY crosses came under heavy selling pressure as investors sought shelter in ‘safe-haven’ currencies. USD/JPY slipped below 93.00, while AUD/JPY and EUR/JPY fell 0.8-1.0%. While data developments were a bit off the radar for currencies last night, there was certainly no support coming for EUR on this front. Not only were February Eurozone retail sales disappointing (-0.6%m/m vs. flat expected), but February German industrial production data (0.0%m/m vs. 1.0% expected) highlighted the risk German growth flat lined in Q1. Later in the night, reassuring comments from ECB President Trichet provided a backstop for sentiment, spurring a reversal in the fortunes of the major currencies. The ECB left rates on hold at 1% last night, as expected. But traders were more interested in President Trichet’s comment at the press conference that "Default is not an issue for Greece". Meantime, a reported 40 percent narrowing in Greece’s Q1 budget deficit also soothed default fears. EUR/USD rebounded towards 1.3350, USD/JPY roared back towards 93.50 and GBP/USD increased to around 1.5260 (helped by some encouraging manufacturing and house price data). In concert with the ECB, the BoE also left its policy rate unchanged last night, at 0.5%, and left its quantitative easing programme at £200b. Looking ahead, markets focus’ is likely to remain on the deteriorating fiscal situation in Greece, especially with the first of the large Greek bond maturities due next week. We suspect another test of the March low in EUR/USD of 1.3265 is likely in coming sessions. Markets are also waiting to see if China will soon revalue the Yuan. An article in last night’s New York Times suggested a move is likely in coming days. Indeed, USD/CNY non-deliverable forwards fell to 6.61 yesterday – the lowest since mid-January. Meanwhile, speculation of a Yuan revaluation also appears to be behind the recent appreciation in other Asian currencies such as MYR, INR, and KRW. *All of the research produced by the BNZ Capital team of economists is available here