by Mike Jones
NZD
The NZD positively melted last week. The combination of plummeting local interest rates and a rapid souring in the global backdrop saw the NZD/USD slide to 6-month lows below 0.7550.
Worries about contagion from a Greek EMU exit sent global markets into a tailspin last week. But it wasn’t all about Greece.
Economic data showed the pace of US recovery has throttled back somewhat, while Chinese economic activity has yet to find a solid base. The ailing health of the Spanish banking sector was also the source of much hand-wringing.
Mounting fears about the health of the global economy scuttled investors’ risk appetite.
The MSCI World Equity index plunged 5.2% through the week and our risk appetite index (scale 0-100%) dropped to 38% – the lowest since December. Generalised risk aversion saw the NZD shunned in favour of the relative safe-haven of the USD and JPY.
The domestic backdrop provided little respite for the friendless NZD. Indeed, NZ swap yields plunged to fresh all-time lows on Friday as local markets moved to price almost 50bps of RBNZ rate cuts over the coming 12 months.
As a consequence, NZ-US 3-year swap differentials – a key short-term NZD driver – fell below 180bps for the first time since the dark days of the global financial crisis.
For this week, the focus for the NZD will remain in Europe. General sentiment towards ‘risk’ remains the dominant short-term driver of the currency.
However, local events could also prove to be. In particular, watch out for Fonterra’s first 2012/13 dairy payout forecast, which may be released tomorrow.
As we’ve been warning about for a while, this is likely to be well down on the current season’s payout. We’re picking $5.80 (from the current season’s $6.80), with downside risk.
While this shouldn’t technically be ‘news’ (given the partial dairy price information), the announcement effect has definite potential to knock the NZD lower.
On Thursday, the NZ Government will hand down another “zero Budget” – mainly an exercise of spending and income tweaks and reprioritisation, with no material policy announcements that haven’t already been “leaked”.
We expect preservation of the previously outlined path to surplus by 2014/15, with net debt still peaking below 30% of GDP. With this, we expect a conditional tick from the rating agencies.
While the NZD/USD is starting to look a little ‘oversold’, ongoing global risk aversion and the likelihood of more uninspiring local news should limit NZD bounces this week.
All up, we suspect the NZD/USD will settle into a lower 0.7500-0.7640 range. A convincing break of 0.7500 would bring into view a test of November’s 0.7375 lows.
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Majors
Fear and loathing continued to swirl around financial markets on Friday, slamming investors’ risk appetite. Risk-sensitive currencies fell against the USD, while the EUR registered a surprising bounce.
Fears about the stability of the European banking system and Greek contagion dominated market attention last week.
On Friday, risk aversion remained in vogue after Moody’s slashed the ratings of 16 Spanish banks and Greece’s rating was cut from B- to CCC (one notch above default). Some weak-looking Chinese property price data further soured the mood.
Asian equities were a sea of red. The Nikkei fell 3% and the ASX 200 slipped 2.7%, to be down 5.9% for the week. European and US equities soon followed Asian markets down with the VIX index (a risk aversion proxy) rising to new 6-month highs above 25%.
The ‘risk-off’ tone saw the ‘pro-risk’ AUD, CAD, and NZD continue to suffer on Friday. However, the EUR enjoyed a small bounce partway through the session thanks to healthy demand from Asian central banks.
A modest squeeze on speculative players’ short EUR positions saw the single-currency climb nearly a cent off its lows to finish the week around 1.2780. We wouldn’t be surprised to see something of a reversal early in the week.
The weekend’s G8 meeting provided the usual amount of hopeful rhetoric, but was a little short on action or specifics.
As such, it should be a non-event for markets. Notably, world leaders reaffirmed their preference for Greece to remain in the Eurozone while the UK and US ramped up the pressure on European policy makers to boost growth in the region. This is more or less code for full blown ECB quantitative easing, something Germany is still resisting for now.
Looking ahead, currency markets will likely continue to be driven by headlines emanating from Europe this week.
This is particularly so given the EU is holding a summit on Wednesday. Amongst the data on offer, European and Chinese PMIs will be worth keeping an eye on. These may well be weak, further inflaming global growth worries.
The Bank of Japan also meet this week and, post better Q1 GDP, may have leeway to hold the line on additional asset purchases.
However, a stronger JPY and political pressure may compel the BoJ to ease further at some stage. This week’s Japanese CPI data may also prove disappointing (more deflation). We still favour a stronger JPY near term.
Lastly, it’s an important week for the GBP, with a slew of UK data and the Bank of England minutes on Wednesday.
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