Opinion: Easing Greece fears, stronger recovery boost appetite for NZ$

By Mike Jones The NZD/USD spent most of last week chopping broadly sideways in a relatively tight 0.6950-0.7100 range. The global outlook has become more NZD supportive of late as forecasts for the global economic expansion continue to rise and concerns around Greece, and its potential implications for global markets, diminish. The associated gains in investors’ risk appetite pitched NZD/USD to a 5-week high of nearly 0.7100 last week. Our risk appetite index (which has a scale of 0-100%) has risen to 70% - the highest since May 2008. However, last week’s RBNZ Statement proved a tad more dovish than market expectations, knocking the NZD from its highs. NZ-AU 3-year interest rate spreads tumbled to 15-year lows (of around -90bps) in the wake of the Statement, and NZD/AUD slumped to 0.7650. Friday’s decidedly tepid retail sales figures kept the pressure on NZD/USD, ensuring it (once again) finished the week close to where it started, at a touch above 0.7000. Following the flood of data last week, the local calendar is relatively sparse over the coming week. The highlight may well be Thursday’s ANZ-RM consumer confidence survey, where some slippage from February’s above-trend 123.6 reading seems likely. As such, offshore developments are expected to provide direction for the NZD this week. Specifically, the Eurozone finance minister’s meeting early in the week and Wednesday morning’s FOMC meeting will provide key event risk. Our short-term valuation model suggests NZD/USD is undervalued at current levels. The current combination of risk appetite, NZ-US 3-year swap spreads and commodity prices suggests a ‘fair-value’ range of 0.7100-0.7300. We suspect a move into this range is likely in coming weeks, in the absence of another bout of risk aversion or a worsening in concerns about European sovereign risk. In the short-term, a daily close above 0.7070 is needed for NZD/USD to break out of its 0.6950-0.7100 range. ‘Safe-haven’ currencies such as the USD and JPY were shunned on Friday night as upbeat global data spurred confidence about the global outlook. The USD index ended the week down nearly 1%. Sharp gains in EUR paved the way for a weaker USD early in the night. Eurozone industrial output soared 1.7%m/m in January, the strongest monthly gain since 1989 (0.7% expected). The stronger data encouraged a sharp paring of speculators’ record EUR net short position, and EUR/USD jumped from 1.3680 to almost 1.3800 US and Canadian data also came out on the stronger side of the ledger, further bolstering investors’ risk appetite. US retail sales ticked up 0.3%m/m in February (-0.2% expected) and February Canadian unemployment fell to 8.2% (8.3% expected). The VIX index (a proxy measure for risk aversion) dropped from 18.5% to around 17.6%. Stocks ended the night broadly flat, but nevertheless rose strongly over the week. The MSCI World Index ended the week 1.4% higher, while the S&P500 made new year-to-date highs on Friday. Improved confidence about the global outlook saw investors ditch ‘safe-haven’ currencies like the USD and JPY. Comments from Japanese Finance Minister Kan suggesting intervention in JPY is possible only added to selling pressure on JPY. USD/JPY spiked above 91.00 before drifting back to 90.50. Pressure on China to allow the Yuan to appreciate continues to intensify. Respected trade economist Paul Krugman said global growth would be 1.5% higher if China relaxed controls on the Yuan. Still, China continues to rebuff any such calls. Comments from Chinese Premier Wen over the weekend refuted recent claims that the Yuan is undervalued. Central bank meetings present the key event risk this week. The FOMC meeting will garner the usual amount of market attention and likely confirm the Fed’s MBS and Agency debt buying will finish at the end of March. A modest upgrade of the Fed’s assessment of the US economy is also likely. As such, we suspect the meeting risks being mildly USD-positive. This week’s Bank of Japan meeting should be more exciting than usual. The JPY has suffered of late from market speculation the BoJ will increase its asset purchase scheme to stave off deflationary pressures. If the BoJ fails to deliver, expect a bounce in JPY. Also keep an eye on any headlines stemming from the Eurozone finance minister’s meeting early in the week. Weekend press articles suggest a €25b bailout for Greece is on the verge of agreement, but both the French and German Finance Ministers have denied such speculation, as usual. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here