Opinion: NZ$ wobbles as markets focus on Greek debt, US rates and China growth fears

By Danica Hampton The NZD/USD has spent most of the past 24 hours consolidating within a 0.6890-0.6970 range. After storming higher on Wednesday night, NZD/USD seems to have paused to catch its breath. Yesterday's slightly weaker-than-expected Chinese trade data (exports rose just 21%y/y, worse than the 28% forecast) and rumoured Asian central bank demand for USD provided some headwinds. As such, the NZD/USD dribbled lower through our afternoon. Overnight, speculation about a Greek rescue package continued. While investors hope Europe will step in a bailout Greece, it's difficult to know how quickly (and in what form) a rescue package could be implemented. Officials have adamantly denied that an agreement has been reached and the cost of insuring Greece debt rose again last night (1-year sovereign CDS spreads climbed 67bps to a fresh high of 701.6bps). Investor confidence was also knocked by signs the US may begin scaling back its emergency stimulus efforts. Bernanke signalled that short-term interest rates would eventually rise and the Fed would need to rein in its asset purchase programs. The denials about a Greek bailout and comments from Fed Chairman Bernanke took a toll on risk appetite and NZD/USD sank briefly below 0.6900. Japan is closed today for a holiday, but the data due out of Australia and China should keep things interesting. The market is looking for a 15,000 gain in Australian employment, which will see the unemployment rate edge up to 5.6%. Chinese CPI is expected to rise to 2.1%y/y in January and an elevated reading could see investors fret over the potential for further PBOC tightening. Global sentiment will remain key to the near-term fortunes of the NZD/USD. For today, we look for consolidation within familiar ranges. In the absence of a melt-down in Asian equities, we suspect dips will be limited to 0.6880. Some headwinds are expected ahead of 0.6990-0.7000. The USD finished the night a touch stronger against most of the major currencies last night. Not only did European officials deny rumours of a Greek rescue plan, but Fed Chairman Bernanke outlined plans to reduce US emergency stimulus efforts. Renewed concern about Greece's debt crisis took a toll on sentiment last night. Investors hope European policymakers will put together a rescue plan for Greece. However, it is unclear how such a bailout package would be structured and how long it would take to materialise. Overnight, officials from Germany and France were adamant that no agreement has been reached and the cost of insuring Greek debt rose last night "“ 1-year sovereign CDS spreads climbed 67bps to a fresh high of 701.6bps. Signs the US may begin scaling back its emergency stimulus efforts also knocked investor confidence a little. In written testimony, Fed Chairman Bernanke signalled that short-term interest rates would eventually rise and the Fed would need to rein in its asset purchase programs. While no timetable was provided, investors worry US economic growth will struggle without heavy government support. Worries about the global outlook and the Greek situation saw EUR/USD slip from above 1.3800 to around 1.3680. However, media reports suggesting that Eurogroup Chairman Juncker is planning to present a plan for helping Greece at tonight's European Leaders Summit has helped EUR/USD rebound off its lows. GBP/USD skidded from above 1.5750 to below 1.5575. UK industrial production was surprisingly good (falling just 3.6%y/y in December vs. -4.1%y/y), but the positive sentiment was quickly eroded by the Bank of England Inflation Report. The inflation forecasts were unambiguously lower than November's, with inflation anticipated to still be sitting around 1.2% in two years time. The low inflation forecasts suggest the Bank of England will not be raising rates in 2010. What's more, in the accompanying press conference, Governor King said it is "far too soon" to rule out more quantitative easing. While European equities eked out small gains (FTSE rose 0.15% and the DAX rose 0.5%), Wall Street is more or less flat. Keep an eye out for today's Chinese data, which includes PPI and CPI. Elevated readings could well make investors jittery about the potential for more PBOC tightening. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.