Opinion: Kiwi$ slides again to 76 Australian cents

By Mike Jones The NZD was the weakest performing currency overnight, for the second day running. Not even a valiant effort from NZ's cricketers could prevent NZD/AUD from continuing on its path southwards last night. Yesterday's Australian GDP data showed growth picked up to 2.7%y/y in the fourth quarter, underscoring the RBA's view the Australian economy is running "close to trend". The contrast to NZ is obvious, with Q4 annual GDP growth here expected to print closer to flat. As a consequence, NZD/AUD slipped a further 1% to nearly 0.7640 last night. Heavy selling was noted from both macro and momentum players. Despite what was a generally upbeat night for "˜risk-sensitive' currencies, the weaker NZD/AUD was again the NZD/USD's ball and chain. Global sentiment was buoyed by Greece's announcement of a fresh set of austerity measures designed to stave off a sovereign default. With the deficit slashing plans getting the big tick from the EU and the IMF, risk appetite improved and global equity markets posted solid gains. Our index of risk appetite (which has a scale of 0-100%) rose to 66%, not far off the year to date high of 70% reached in January. Against this backdrop, "˜safe-haven' currencies were shunned; the USD index fell nearly 0.7%. Still, NZD/USD was confined to a broadly sideways 0.6900-0.6980 range. In contrast, the GBP was the star performer of the night. The upbeat UK services PMI (which rose to 58.4 in February vs. 55.0 expected) prompted a sharp paring of GBP "˜short' positions. As a result, NZD/GBP slipped below 0.4600 from close to 0.4650, adding another weight on the NZD. We suspect it will take a strong reading from Monday's NZ manufacturing survey and/or Wednesday's terms of trade data to see a short-term stabilisation in NZD/AUD. Whether or not we see any dovish undertones from next week's RBNZ Statement will also be important. Near-term support on NZD/USD is eyed towards 0.6890 with resistance at 0.7070. The USD weakened against nearly all the major currencies overnight as easing fears over Greece and upbeat global data allayed concerns about the global outlook. Market sentiment was cheered by Greece's announcement of a fresh set of austerity measures to slash its budget deficit. A further €4.8 billion in pay cuts and tax increases was pledged, spurring optimism Greece's target deficit cut of 4% of GDP is still achievable. Indicative of such, Greek 5-year CDS spreads (a measure of Greece's implied default probability) fell to around 320bps "“ the lowest since mid-January. Greece's new cutback plans also got the thumbs up from all of the IMF, the Eurogroup, and the European Commission, underscoring a broad improvement in risk appetite. The VIX index (an indicator of US stock volatility used as a proxy for risk aversion) fell to 18.5%, from above 19% the day before and nearly 29% at the beginning of February. Global stock markets were buoyed not only by easing fears over Greece, but also some relatively upbeat global data. Most notably, the UK PMI services index jumped to to 58.4 in February, from 54.5 in January "“ well above the 55.0 expected. Eurozone retail sales and services PMI were more or less in line with expectations, but the February US ISM non-manufacturing index exceeded expectations by a clear margin (53.0 vs. 51.0 expected). European stock indices rose 0.5-1%, while the S&P500 is currently up around 0.4%. Improved confidence about the health of the global recovery saw investors trim positions in "˜safe-haven' currencies like the USD last night. Both GBP and EUR experienced a vicious paring of short positions, given the extent of "˜bad news' that has been priced into these currencies lately. EUR/USD surged above 1.3700 from 1.3640, shrugging off more comments from Germany that no support will be forthcoming for Greece. Meanwhile, GBP/USD bounded above 1.5100 as the strong PMI data and a surprising gain in consumer confidence allayed fears over a double-dip recession for the UK. Looking ahead, with the Greece doomsday scenario being priced out of EUR and confidence about the global recovery improving, we suspect EUR/USD will find support on any dips towards 1.3600. However, near-term event risk is expected from the second estimate of Q4 Eurozone GDP released tonight (0.1%q/q expected). Tonight also brings policy announcements from the Bank of England and the ECB. Both are expected to keep their key policy rates unchanged (at 0.5% and 1% expected). * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here