Opinion: NZ$ hits 9-month low versus A$ as markets see later NZ OCR hike

By Mike Jones The NZD has started the week on a firm footing. The updraft from a slightly softer USD has seen NZD/USD drift back above 0.7000. Currency markets were relatively subdued overnight. In large part, investors are waiting for further clarification on how quickly the Fed intends to wind back policy stimulus when chairman Bernanke testifies before the house later in the week.

Overnight, speculation over an early exit from the Fed's monetary stimulus was pared back somewhat, dragging the USD lower. San Francisco Fed President Yellen reiterated "the (US) economy still needs the support of extraordinarily low rates". Headlines that (a) Germany had rejected speculation over a €20b rescue package for Greece and (b), troubled Dubai construction company Nakheel is unlikely to repay all of its bonds kept risk appetite on the back foot last night. While NZD/JPY slipped from 64.40 to 63.90, the softer USD ensured NZD/USD tracked a tight 0.6990-0.7040 range. Looking ahead, the highlight of this week's local data schedule looks set to be Thursday's NBNZ business survey. A broad range of largely second tier indicators will also be released. All up, we expect this week's data to show signs of ongoing economic recovery, even if a bit more caution creeps in. Should this pan out, we'd expect the NZD to remain well supported over the week. However, we suspect the firming USD will limit any bounces to the 0.7150-0.7200 region in the short-term. As such, expect a bit more range trading in NZD/USD this week. The more interesting currency stories, in our view, are currently playing out amongst the NZD crosses. In particular, NZD/AUD has recently slumped to 9-month lows around 0.7770. NZ markets have gravitated towards our view for a June start to the RBNZ tightening cycle. But if Australian markets are indeed underpricing the chances of near-term RBA hikes, as we suspect, we may see further (limited) downside in NZD/AUD this week. In this regard, RBA Deputy Governor Battellino will deliver a speech tonight (8:00pm NZT) entitled "Mining Booms and the Australian Economy". It was a relatively lacklustre night in currency markets, with no major data or news to drive sentiment. Most of the major currencies tracked a broadly sideways range. At the margin, the USD edged slightly lower. Expectations of an early Federal Reserve interest rate hike were wound back further. The Fed's surprise decision on Friday to increase its discount rate saw traders rush to price in earlier rate hikes from the Fed. However, cash rate expectations continued to ease overnight, providing something of a drag for the USD. San Francisco Fed President Yellen said, "For the time being, the economy still needs the support of extraordinarily low rates", echoing recent sentiments from colleagues Bullard and Lockhart. US 2-year Treasury yields drifted off to 0.89%, around 7bps below Friday's 0.96% high. The implied interest rate on the December Fed Funds futures contract fell to 0.58%, around the same as before Friday's discount rate hike. European stocks and EUR found some early support from media reports Germany was preparing a €20b rescue package for Greece. The DAX opened 0.4% higher and EUR/USD ground up to nearly 1.3650. But with both Germany and the EU denying any such deal was in the pipeline, gains proved to be temporary. Nevertheless, Greek bond spreads have continued to drift lower over the past week or so as fears over a sovereign default have eased. 10-year Greek government bond yields are currently trading around 315bps above German bunds, some 90bps below the peak in early February. Once again, GBP was the whipping boy of currency markets, as election concerns continue to weigh. GBP/USD really just mooched around 1.5430-1.5520 range. Recent polls show the opposition Conservatives' lead shrinking, increasing the chances of a hung parliament in this year's election. Looking ahead, there is plenty of event risk to watch out for this week. Further evidence of the degree of divergence amongst the major economies will be provided by Q4 GDP estimates for the US, the UK and Germany. Meanwhile, the Fed and its planned exit strategy from current accommodative monetary conditions will remain in focus. Several Fed officials are due to speak and chairman Bernanke is set to deliver his semi-annual address to the US Senate. We suspect Bernanke will reiterate the Fed's pledge to keep rates low for an "extended period". While this may provide some near-term headwinds for the USD, ongoing European sovereign debt concerns and speculation the Fed will lead the G3 in policy tightening should keep the USD index supported on dips towards 79.60. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.