By Danica Hampton
The NZD/USD nudged higher on Friday night, underpinned by a continued recovery in global equities and risk appetite.
Equity markets worldwide staged an impressive recovery last week, bolstered by a rebound in financial stocks and acquisition talk in the healthcare sector. The S&P500 rose 0.77% on Friday and finished the week up 10.7%. Strong gains in equities encouraged investors to trim "˜safe-haven' positions in the USD. Against a generally weaker USD, the NZD/USD pushed above 0.5250 on Friday -its highest level in a month.
The G20 central bankers and Finance Ministers met at the weekend. The G20 statement encouraged governments to take appropriate action, but failed to define what constitutes "appropriate" (other than to keep monetary policy expansionary and implement pipeline fiscal spending without delay). However, the weekend's meeting was really just a prelude to the G20 leaders meeting on April 2.
The big question for the coming week is whether or not the recent rebound in risk appetite and equity markets will continue. Should global equities continue to recover, we'd expect the trimming back of "˜safe-haven' positions to keep the USD weak and the NZD/USD underpinned. On the flipside, signs that the bout of optimism is unravelling will quickly send the NZD/USD lower again.
It's worth noting, the wake of last week's RBNZ decision we've seen a bit of upward pressure on NZ interest rates and this has seen NZ-US interest rate spreads widen (3-year swap spreads widen about 35bps to 1.89% last week). The widening of NZ-US interest rate spreads, plus an improvement in risk appetite, has seen the "fair value" level of NZD/USD (as implied by our short-term valuation model) rise to 0.5175-0.5375 from 0.5000-0.5200 a week ago.
For the coming week, the fortunes of the NZD/USD will be tied to global developments. Should risk appetite and global equities continue to recovery, we could see NZD/USD push up towards 0.5350-0.5400.
It was really a case of "steady as she goes" for currencies on Friday night. The US trade deficit improved (narrowing to -US$36.0b from -US$39.9b in December) and equity markets chalked up modest gains (the S&P500 rose 0.77%), but there wasn't a lot in the way of fresh impetus. EUR/USD spent most of the night between 1.2850-1.2950, while USD/JPY hugged a 97.60-98.60 range.
Equity markets around the world staged an impressive recovery last week, bolstered by a strong rebound in financial stocks and takeover speculation in the healthcare sector. Over the course of last week, the S&P500 surged 10.7% and the MSCI World Equity Index climbed 8.5%.
The rebound in equities and risk appetite saw investors pare back "safe-haven" positions and this tended to result in a generally weaker USD. Recovering risk appetite also encouraged demand for JPY crosses and CHF weakness was also prominent after the Swiss National Bank started to intervene. As a result, the JPY and CHF were the worst performing currencies last week.
EUR/USD nudged higher last week, from around 1.2550 to above 1.2900, supported by a generally weaker USD and cross demand fro EUR/JPY and EUR/CHF. The EUR recovered despite deteriorating Eurozone data and perceptions that Eurozone policy makers are dragging the chain with regards to policy stimulus.
The G20 met on Saturday and the statement was similar to February's G7 communiqué, imploring national governments to take appropriate action but falling short of specific prescriptions. On fiscal spending, the G20 said pipeline spending should be implemented without delay, but did not call for more spending. On monetary policy, the G20 told central banks to maintain expansionary policies for as long as needed and encouraged the use of a full range of instruments. There was also a general commitment to increase IMF resources, but no specific details on additional amounts member countries will contribute.
Investors weren't expecting a lot from the weekend's G20 meeting (it was really a prelude to the G20 leaders meeting on April 2) and the resulting communiqué should not surprise market participants. The bigger concern for investors this week will be whether or not the recent rebound in risk appetite and equity markets will be sustained. Should global equities continue to recover, we'd expect the USD to remain weak.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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