Opinion: NZ$ falls below 74 USc on fears about Greece, China, bad US loans

By Danica Hampton The NZD/USD drifted lower on Friday night. However, it's hard to get overly excited "“ the local currency spent all of last week within a relatively tight 0.7350-0.7450 range. Hopes about a robust economic growth in the antipodean economies provided a bit of support for both the AUD and NZD last week. In NZ, the Quarterly Survey of Business Opinion was consistent with NZ economic growth returning to trend in 2010. Across the Tasman, the Australian employment report was just another indicator suggesting the Australian economy is going from strength to strength. Market pricing is now consistent with about a 75% chance of the RBA hiking rates 25bps in February. However, fading risk appetite and soft global equities helped limit the gains in NZD/USD. Last week's US corporate earnings reports were a bit of a mixed bag. While Intel surprised on the upside, JP Morgan's larger-than-expected loan losses raised concerns about bank profitability in Q4. Worries about Greece's sovereign solvency and China's efforts to slow sectors of the economy also took a toll. The S&P500 fell 1.08% on Friday and finished the week down 0.8%. Looking ahead, we suspect the USD will continue to shuffle sideways this week. The US corporate reporting season will gather pace this week, but with US interest rates steadily falling (US 2-year government bond yields have fallen 25bps this year as investors have delayed the anticipated timing of the Fed's first rate hike) we doubt earnings disappointments (and risk aversion) will result in a persistently stronger USD. It's worth noting, the recent decline in US interest rates have increased the yield advantage of the NZD. NZ-US 3-year swap spreads have widened out to around 325 bps, from closer to 310bps at the start of the year. This has pushed up the NZD/USD "˜fair-value' range implied by our short-term valuation model to 0.7400-0.7600. Locally, there's plenty to watch this week. With the RBNZ expecting a soft Q4 CPI (-0.2%), Wednesday's release has the potential to over-excite the market. We're expecting a 0.1% rise, which would set annual inflation at 2.2%. On Thursday, we'll get November's retail sales, December's Performance of Manufacturing Index and January's ANZ-Roy Morgan consumer confidence reading. All up, it will probably be another range bound week for NZD/USD. While weaker global equities and disappointing corporate earnings may provide some weight early in the week, we expect dips will be limited to the 0.7280-0.7300 region. Despite lacklustre US equities, the USD edged higher on Friday night. The USD was helped by solid US data and lingering concerns about the problems afflicting Greece. A disappointing earnings report from JP Morgan saw Wall Street dive over 1% on Friday night. JP Morgan reported higher-than-expected loan losses in Q4, which raised concerns about bank profitability in general. JP Morgan shares fell 2.3% and dragged other banking stocks lower. The S&P500 fell 1.08% on Friday and finished the week down 0.8%. The US data printed more or less in line with expectations. There was some improvement in the Empire manufacturing survey (it rose to 15.92 in January vs. 12.00 forecast) and US inflation pressures remain benign (annual CPI rose to 2.7% in December, a touch softer than the 2.8% forecast). Meantime, the preliminary University of Michigan consumer confidence index rose to just 72.8 in January (disappointing expectations of 74.0). Worries about Greece saw EUR/USD slip from 1.4450 to around 1.4350. Once again, President Trichet warned that Greece will not get any "special treatment" as a result of its fiscal difficulties. 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. Investors are looking for guidance as to whether or not equity markets can build on the strong gains seen since the lows in March 2009. In addition to the US corporate earning season, expect investors to keep an eye on China's efforts to slow the economy. Worries about European sovereign solvency still abound and it will be worth paying attention to the European Finance Ministers' meeting on Monday. This week's German ZEW and the services and manufacturing PMIs will provide an update on how the Eurozone economy is faring. It's also a full week for UK releases. Not only are the Bank of England Minutes due, but we'll see the UK employment figures and the latest government borrowing numbers. 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.