Opinion: Kiwi$ nearing bottom after over night slump

By Mike Jones The NZD has been the worst performing currency over the past 24 hours. A plunge in NZD/AUD has seen NZD/USD slip from 0.7000 to nearly 0.6950. The RBA raised interest rates 25bps yesterday to 4%. Markets had priced a roughly 60% chance of a rate rise going into the decision. Still, investors were surprised by the less hawkish tone of the accompanying statement. The RBA was not nearly as gung-ho on the need for future rate rises as some had expected. Rather, the bank now seems content to sit back and watch how domestic data, and sovereign debt concerns, unfold. While the knee-jerk reaction to the RBA decision was to push the AUD lower, the offshore session has seen AUD/USD surge back above 0.9050 as investors anticipate further widening in the AUD's yield advantage. With the RBNZ set to remain on the sidelines for a while longer, the surge in AUD/USD took the expected toll on NZD/AUD. NZD/AUD plunged to around 0.7700, levels not seen since 2000. We had suggested NZD/AUD would test 10-year lows if the RBA hiked yesterday. But we suspect NZD/AUD is now close to finding a bottom. Australia is clearly in better shape than NZ at present, but this can't last forever. A narrowing in Australia's growth advantage this year is expected to see NZD/AUD recover, albeit gradually.

Despite what was a generally positive night for risk appetite and equity markets, the NZD/USD was hamstrung by the weaker NZD/AUD last night. Still, the NZD did receive some respite from the upbeat results from Fonterra's latest online milk price auction. The average whole-milk powder price rose 0.8% (to be up 52% on an annual basis), in contrary to expectations for a decline. Looking ahead, direction for NZD/USD and NZD/AUD is expected to continue to come from across the Tasman with Q4 Australian GDP data released at 1:30pm (NZT). Our Australian colleagues are looking for a 0.9%q/q gain. Last night's movements in currency markets are best described as a bit of a mixed bag. Early in the night, USD strength was the main theme as EUR was weighed down by political uncertainty in Greece. Widespread strikes protesting against Greece's proposed austerity measures spurred worries Greece will not be able to trim spending enough to satisfy the EU. As a result, EUR/USD briefly tumbled to a fresh 10-month low close to 1.3440. The GBP was dragged lower in EUR's wake amid ongoing UK political uncertainty. GBP/USD slid to 1.4880 from above 1.4920. However, the lows in EUR and GBP didn't last for long. Investors' mood improved later in the night as media reports suggested Greece may announce new austerity measures, including higher taxes and bigger cuts to public workers' bonuses. Greek Prime Minister Papandreou is due to meet the German Chancellor Merkel on Friday. Greek 5-year CDS spreads dipped below 350bps and EUR/USD scrambled back to around 1.3560. A spike higher in EUR/CHF on rumours of Swiss National Bank intervention also helped the EUR recover. Not only did a turnaround in the EUR's fortunes weigh on the USD, but a third straight day of gains in global equities saw investors trim positions in "˜safe-haven' currencies. Easing fears over Greece saw European equities post gains of 1-1.5% (the German DAX index is up 3.2% for the week), while the S&P500 is currently up 0.4%. The VIX index (a measure of S&P500 volatility used as a proxy for risk aversion) fell below 19% for the first time since mid-January. The Bank of Canada left interest rates on hold at 0.25% at its meeting overnight. Still, the accompanying statement was noticeably more upbeat than previously. The BoC maintained its projection to keep rates on hold until the end of June, but noted economic growth had exceeded the BoC's expectations. The CAD surged in the wake of the decision; USD/CAD plunged from 1.0360 to 1.0330. Looking ahead, the near-term fortunes of the USD will depend on a) whether the next instalment of Greek austerity measures is seen to be sufficient, and b) the tone of tonight's European data. European retail sales and UK and European services PMIs are due for release. Further signs of stagnation in the European economies or further disappointment on Greece's efforts to rein in its deficit will likely provide further support to the USD. Initial resistance on the USD index is seen towards last night's high of 81.20. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.