Rising commodity prices and easing risk aversion sees the NZD/USD head higher

By Mike Jones

NZD

The NZD continues to dance to the beat of global risk appetite. After starting the week around 0.8290, the NZD/USD has leapt around ¾ cent over the past 24 hours as global risk sentiment brightened.

Equity markets and risk appetite received a boost yesterday from the passing of the Greek austerity package. While there is still a long way to go to save Greece (not least agreement on the PSI deal), markets are happy to take it one day at a time.

The major equity indices have notched up gains of 0.4-0.9% over the past 24 hours and our risk appetite index (which has a scale of 0-100%) rose from 52% to 55.9%. Commodity prices were also a beneficiary of the more positive global backdrop. Oil prices leapt 1.5% to US$100/barrel while the broader CRB global commodity price index crept up 0.3%.

Rising commodity prices and easing risk aversion saw the NZD/USD head up to almost 0.8370 before dribbling off its highs. NZD/EUR climbed from 0.6280 to around 0.6320, while NZD/AUD ground up towards the top end of its recent 0.7720-0.7790 range.

We expect the NZD/AUD to gradually drift higher this year. Monetary policy expectations tend to be the most important driver of the cross. We expect the RBNZ to begin lifting the OCR from late this year. In contrast, the RBA is on an easing bias and may cut rates again. This contrasting monetary policy stance should see NZ-AU interest rate differentials narrow in coming months, underpinning the NZD/AUD. In the short-term, downside risks predominate. Our short-term NZD/AUD valuation model suggests a 0.7500-0.7700 “fair-value” range.

For today, January NZ food price data will provide insight into Q1 CPI, but shouldn’t ruffle the NZD. Across the Tasman, the NAB business survey will be released. Resistance on NZD/USD is expected towards last week’s 0.8407 high, with support likely to be found in the 0.8270/80 window.

Majors

The USD weakened against all of the major currencies overnight.

Financial market sentiment brightened noticeably yesterday after the Greek parliament approved the latest (€3b) austerity package. This paves the way for the troika (EU, IMF, and ECB) to release the second Greek bailout package (worth €130b).

Equity markets experienced a modest relief rally. The Athens General stock index jumped 4.7%, even as violent protests erupted in the capital. The German DAX closed 0.7% higher and the S&P500 is currently up around 0.5%. The VIX index (a proxy for risk aversion based on the implied volatility of the S&P500) dipped from 22% to around 19.5%.

Firming equity markets and improving risk appetite saw “growth-sensitive” currencies like the NZD and the AUD outperform. Indeed, the “safe-haven” USD has weakened across the board. Trading in the EUR/USD was a little more mixed. After initially climbing above 1.3250 following approval of the Greek bill, the single-currency subsequently eased around ½ cent off its highs. Market chatter suggesting the Greek PSI deal could be delayed (again) dented EUR sentiment, as did rumours Greece may try and change its austerity conditions at a later date. The net result is the EUR/USD finished the night close to where it started around 1.3200. 

There was little reaction to yesterday’s 0.6%q.q decline in Q4 Japanese GDP (-0.3% expected). This rounded off a terrible year for Japan (in which GDP fell 0.9%y/y). USD/JPY rallied from 77.60 to 77.80 in the wake of the data.

The Bank of Japan started its two-day policy meeting yesterday. Despite the headwinds facing the Japanese economy, the BoJ is expected to refrain from taking additional monetary easing steps, largely because there are no options left. Rates are already at zero and the BoJ is engaged in large scale asset purchases. We expect the JPY to gradually weaken this year (year end USD/JPY target 81.00).

Elsewhere, markets are eagerly awaiting the outcome of Wednesday's EU finance ministers' meeting. Investors are hopeful the second Greek bailout package will be passed.

This will certainly be needed to keep the recent rally in “risk sensitive” currencies intact.

Tonight brings US retail sales, UK CPI and the German ZEW survey. Near-term support on the USD index is seen around 78.35 with resistance expected on bounces towards 79.50.

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