Opinion: Easing Greek fears push NZ$ below 52.5 euro cents

By Mike Jones The NZD was one of the strongest performing currencies last week. Still, it was really a case of NZD/USD consolidating within a relatively tight 0.7000-0.7100 range. Against a backdrop of broad USD strength and plunging European currencies, NZD/USD managed to hold its ground. What’s more, on a trade-weighted basis, the NZD pushed around 1% higher. NZ’s economic data, while not exactly shooting the lights out, continue to paint a picture of relative health compared to many of our trading partners. Fourth quarter data showed NZ’s current account deficit narrowing to 2.9% of GDP (from 8.7% a year earlier) and annual GDP growth creeping into positive territory for the first time since June 2008. So, while NZD/USD basically went sideways last week, NZD/GBP surged to fresh 30-year highs above 0.4750 and NZD/EUR reached 2-year highs close to 0.5300. However, gains in NZD/GBP and NZD/EUR were tempered on Friday night, providing a drag for NZD/USD. European leaders finally announced the details of a support package for Greece. In combination with the IMF, Euro-zone countries will make loans to Greece available (worth around €20b), should it end up asking for help. While Greece is undoubtedly still ill, easing fears over a Greek default propped up the struggling EUR on Friday. EUR/USD surged from sub-1.3300 to nearly 1.34500 sending NZD/EUR back below 0.5250. For this week, Wednesday afternoon’s NBNZ business survey is the coming week’s only substantive data item. Its last edition proved even stronger than we imagined, signalling GDP growth picking up to a 4% annualised pace. In contrast, it’s a packed data line-up offshore, despite the holiday-shortened week. Most notably, US non-farm payrolls will be a crucial test of whether US bond yields, and the USD, can hold onto recent gains (analysts expect 15,000 jobs were added in March). It’s worth noting, according to our short-term “fair-value” model, NZD/USD is still ‘cheap’ around current levels. Our model suggests that the current combination of NZ commodity prices, NZ-US 3-year swap spreads, and global risk appetite is equivalent to a NZD/USD ‘fair-value’ range of 0.7200-0.7400. In the absence of another bout of global risk aversion, we expect NZD/USD to creep into this range in coming weeks. All up, we suspect reduced pessimism about Greece’s fiscal woes and expectations of a building NZ economic recovery will limit dips in NZD/USD to 0.6960 this week. Rallies are expected to be capped to the 0.7100 region in the short-term. Greek safety net The USD slipped against most of the major currencies on Friday night. US bond yields pared some of their recent gains and EUR/USD found support from the announcement of an aid package for Greece. European leaders agreed on Friday to provide a safety net for Greece. In tandem with the IMF, bilateral loans will be made available to Greece, should it ask for help. While no numbers were provided, the package is thought to be worth €20-22b. While market reaction was subdued at first, ECB President Trichet later endorsed the plan saying he was “extraordinarily happy” a workable solution was found. The Bank of Greece Governor also provided a prop for sentiment, saying it was unlikely Greece would have to make use of the aid facility. In response, Greek 5-year CDS spreads dropped 15bps to 295bps and the Greek stock index rose 5.2%. Meantime, the reduced risk of a Greek default kept EUR crosses in strong demand. EUR/AUD jumped over 1% to 1.4850, EUR/JPY rose above 124.00 from 123.00 and EUR/USD scrambled back above 1.3400. Still, gains were capped by the fact the rescue deal will only be used as a last resort and requires unanimous euro-zone approval (effectively giving Germany a veto). With the USD already on the back foot, Friday’s US data simply reinforced pressure on the USD. University of Michigan Consumer Confidence increased broadly as expected in March (73.6 vs. 73.0 expected). But Q4 US GDP data was revised down, against analyst expectations (5.6% annualised vs. 5.9% expected). As a result, US 10-year Treasury yields dipped 3bps to 3.85%, but nevertheless ended the week up 16bps. It’s a fairly hefty week ahead for US data, culminating in March non-farm payrolls on Friday (+15,000 jobs are expected to be added). However, with Europe on holiday over Good Friday, market reaction may well be limited. Elsewhere, Chinese and European manufacturing PMIs, and German unemployment data should ensure there is plenty of event risk to keep markets occupied. In the absence of a surge in non-farm payrolls, we suspect bounces in the USD index will be limited to 82.00 this week. With the worst of the Greek crisis seemingly behind us, speculators may be inclined to further pare some of last week’s record net short EUR position. In this regard, keep an eye out for any news of a multi-billion Greek bond issue, rumoured to be in pipeline for this week. The success or otherwise of this issue will be a key barometer of the markets’ confidence in Greece’s fiscal situation. *All of the research produced by the BNZ Capital team of economists is available here