Opinion: Kiwi$ wobbles on Greece fears, but focus is on Wednesday's CPI and OCR outlook

By Danica Hampton There's not a lot to write home about currency-wise as US markets were closed for the Martin Luther King holiday. Yesterday the focus was on Greece and its sovereign solvency woes. EUR came under heavy selling pressure (EUR/USD was squeezed below 1.4340) and selling from short-term speculative players saw NZD/USD dragged briefly below 0.7340 yesterday afternoon. While EUR has remained heavy against the crosses (particularly GBP and CHF), rumoured USD selling from sovereign accounts meant the most currencies ticked higher against the USD overnight. Solid NZD demand was also noted from a variety of local accounts and NZD/USD climbed back above 0.7400 last night. Yesterday's REINZ housing data had negative undertones that will give the RBNZ pause for thought. Sure, the median house price looked strong (it rose another $5,000 to $360,000), but it was flattered by a shift to higher-end properties. However, the real warning of a stalling recovery came from a drop in home sales (sales fell to 15%y/y in December from 42%y/y in November). Home sales have now fallen for three consecutive months and are off about 20% from the peak seen in September. Not only does this suggest some house price vulnerability, but it also portends some slowing in home-building activity. Of course, tomorrow's Q4 CPI has the potential to surprise the market in the other direction. The RBNZ is expecting a relatively soft -0.2% q/q. We're expecting a 0.1% rise, which would set annual inflation at 2.2%. We suspect anything above +0.2% would see market pricing shift to fully price the first RBNZ hike by March this year (current pricing implies a 50/50 chance), which would provide a clear boost to NZD/USD. For today, expect NZD/USD to tread water within familiar ranges. We suspect dips will be limited to around 0.7360. On the topside, expect headwinds ahead of 0.7440. The USD nudged lower against most of the major currencies last night. But it was a lacklustre session, with US markets closed for the Martin Luther King holiday. Early in the night, all the action was in EUR/GBP, which fell from above 0.8840 to a four month low of nearly 0.8780. Not only did lingering concerns about Greece's sovereign solvency weighing of EUR, but GBP was boosted by upbeat UK housing data (Rightmove house prices rose 4.1%y/y in January) and speculation that Britain's International Power was bidding on French utility company GDF Suez. Despite intervention warnings from the Swiss National Bank (SNB), EUR/CHF slipped from above 1.4775 to around 1.4740. The SNB's Hildebrand was quoted over the weekend as saying the central bank would act resolutely to prevent an excessive appreciation of the CHF to ward off the danger of deflation. While the EUR fell against many of the crosses, generalised USD weakness saw EUR/USD climb from sub-1.4350 to nearly 1.4400. The ECB's Nowotny was relatively upbeat of the outlook for the Eurozone and noted that the ECB's growth forecasts for 2010 (currently 0.1-1.5%) could be nudged up at the March update. The EU Finance Ministers are meeting at the moment, so keep an eye out for any sound bites on Greece's solvency issues. Beyond that, tonight's German ZEW business survey should provide an update on how the Eurozone economy is faring. Against the USD, GBP hit a 1-month high of nearly 1.6380 last night. This week should provide plenty of guidance on how the UK economy is tracking. Not only are the Bank of England Minutes due, but we'll see the UK employment and retail figures as well as the latest on the government's borrowing numbers. While investor sentiment started 2010 with a flourish, a mixed dose of US corporate earnings has seen risk appetite fade a little. Last week's strong profit results were accompanied by disappointing revenue numbers and even strong results like Intel ended up sparking selling interest. The reporting season with gather pace over the next three weeks, with more than half of the S&P500 scheduled to report. This should provide guidance as to whether or not equity markets can build on the strong gains seen since the lows in March 2009. While there is a bit of event risk over the coming week, we suspect currencies will remain in a holding pattern. In the near-term, we expect the USD Index to hold a 76.50-78.50 range, with a bias for weakness into, and beyond, the 26/27 January FOMC meeting. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.