Opinion: Kiwi$ firm, but focus is on Greek debt and Australian rate hike

by Mike Jones The NZD ended last week on a firmer note. In fact, NZD/USD was the strongest performing currency on Friday night, meaning NZD/USD closed out the week around 0.7000. Not only did NZD/USD benefit from month-end USD selling on Friday, but risk appetite received a boost from speculation a bail-out package for Greece is close to being announced. Indeed, media reports suggested a consortium of European countries will buy €5-7b of Greek bonds. European equities soared 1.5-2% and our risk appetite index (which has a scale of 0-100%) rose to a 1-month high of 62%. As a consequence, "˜risk-sensitive' currencies like the NZD outperformed on Friday night. Still, NZD/USD spent most of last week trapped in a 0.6850-0.7050 range. Uncertainty over Greece and the solution to its fiscal crisis continues to hang over markets. Meantime, global data seems to have run into a bit of soft patch, suggesting the global recovery won't be as strong as some had expected. While the NZD has been chopped around with seesawing global risk appetite, economic fundamentals have taken a back seat. Indeed, the NZD failed to budge despite last week's NBNZ business survey suggesting GDP growth will pick up to at least the 4% we reckon by later this year. This week's local data flow is a mere babbling brook, relative to the torrent in store for the following week. In contrast, the offshore event schedule is chock full. Central bank announcements from the RBA, BoE and ECB are due, as well as the all-important US non-farm employment report. All up, we suspect NZD/USD is in for a bit more range trading this week as uncertainty about Greece and the global recovery more generally buffets markets. However, a 25bps rate hike from the RBA on Tuesday (market pricing implies a 50:50 chance of such), and/or a confirmation of the weekend's Greek bailout rumours have the potential to shake the NZD out of its holding pattern and test resistance towards 0.7170. Support is eyed on dips towards 0.6850. The USD weakened against nearly all of the major currencies on Friday, weighed down by month-end USD selling and easing fears over Greece's fiscal crisis. A weaker GBP was the focus of the early part of the night. Not only was Q4 UK GDP growth revised down (-3.3%y/y vs. -3.1% expected), but election worries continue to drag on the GBP. Rumours did the rounds an early UK election may be called amid news the Conservatives' lead in the polls has been reduced to just 6%. All of this casts increasing doubt over whether the UK will be able to slash its deficit enough to stave off a ratings downgrade. From above 1.5300, GBP/USD sank below 1.5250. European stocks were buoyed by more speculation over a bailout package for Greece. The FTSE jumped 1.5%, the DAX rose 1.6% and the French CAC 40 soared 1.9%. A report on Friday suggested Germany may buy Greek bonds through state-owned lender KfW. Meanwhile, Jorgo Chatzimarkakis, a member of the European Parliament, backed up these reports saying Germany, France and the Netherlands are preparing a joint bailout package. Combined with the positive day in equity markets, the news saw investors trim "˜safe-haven' positions in the USD and JPY. Widespread USD selling relating to month-end portfolio rebalancing also weighed on the USD, as did January's woeful US home sales data (-7.2%m/m vs. 0.9% expected). EUR/USD ground up to nearly 1.3650, AUD/USD recovered to 0.8950 (helped by a 1.4% increase in the CRB commodity price index) and USD/JPY flirted with year-to-date lows around 88.90. Still, investors were wary over the authenticity of the bailout reports, and this tended to cap gains in the majors on Friday. A senior German official disregarded Friday's reports as "nonsense" while German Prime Minister Merkel said, "there have been absolutely no other decisions taken." Looking back over the past week, EUR/USD has shown signs of stabilising after the 10% odd fall since early December. However, this may just be reflecting the lack of further "˜bad' news on Greece. Looking ahead, central bank policy announcements will occupy the limelight this week. No change is expected from either the Bank of England or the ECB (both Thursday), while the chances of a 25bps rate hike from the RBA on Tuesday are sitting close to 50:50. Elsewhere, heavyweight US economic indicators non-farm payrolls (Friday) and the ISM manufacturing index (tonight) will provide further clues on the strength of the US recovery. We suspect it will take a strong set of economic numbers this week to assuage creeping doubts about the strength of the global recovery, and ensure risk appetite and "˜growth-sensitive' currencies head higher again. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.