NZD/AUD breaks through previous resistance levels; Japan GDP report terrible; Greece’s talks with creditors collapse

By Raiko Shareef

NZ Dollar

It has been a more exciting 24 hours in markets than a US holiday would have promised.

Strong NZ retail sales helped NZD/AUD to a new post-float high, a mixed set of Japanese data leaves investors in two minds about the BoJ’s next move, and Greece’s talks with its creditors have collapsed. The USD has strengthened off the back of EUR weakness.

Locally, the Q4 retail sales report was very strong. The headline gain was much higher than the market had anticipated, and the core measure (excl. fuel and vehicles) printed a punchy +1.5%. There was some regional variation amongst the numbers, but overall, they provide support for our Q4 GDP estimate (due 19 Mar) of +0.9% q/q.

For NZD, the strength of this report took some time to register, with the initial gain in NZD/USD a paltry 30pts. We attribute part of this reluctance to the fact that NZD/AUD was nearing its post-float highs at 0.9660. As expected, that resistance did not hold. The cross drifted up through that level overnight, before dipping back. This allowed NZD/USD to push toward 0.7530. It is the strongest performing G10 currency by some margin.

From here, we think that NZD should continue to rise toward 0.7610n, but it will be constrained by NZD/AUD. The uptrend courtesy of cyclical highs in 1995 and 2005 in NZD/AUD signals a cap at 0.9700 currently. For NZD/USD to push materially higher, therefore, we’d likely need to see some recovery in AUD.

Japan’s GDP report yesterday was terrible in an activity sense. Apart from the headline miss, Japanese officials will be particularly concerned about the weakness in private consumption (+0.3% q/q vs +0.8% exp). This will add to sensitivity that an ever-weakening JPY is hurting consumer sentiment (and spending power). On the other hand, the inflation indicators from this report were stronger than expected (+2.3% y/y vs +1.9%). The idea that inflation is tracking higher, and that consumers would be adversely affected by further JPY weakness, will reduce expectations of more BoJ policy easing in coming months. This should help keep USD/JPY constrained.

This morning, Greece’s talks with its creditors at the Eurogroup meeting collapsed. Media reports suggest that European officials presented a draft press statement which said that Greece intended to successfully conclude to the existing bailout program. Given their campaign pledges, phrases like “current program” and “bailout extension” are anathema to the new Greek government. It is unsurprising that it was taken badly.

As we write, headlines are rolling in that suggest that the position of Greece’s creditors is hardening, and that they will require Greece to accept some sort of bailout extension. In fact, the language suggests that Greece will have to request  such an extension. One suspects that Greek PM Tsipras would rather crawl through broken glass than do that. This smells of a serious standoff. Little wonder that EUR is the worst-performing currency overnight, down 0.5% to 1.1330.

Developments here will be closely watched, and will likely be the key driver for market sentiment in the near-term. he Elsewhere, the RBA minutes today are unlikely to provide much fresh information. The dairy auction will be a driver for NZD, as always.

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