Opinion: NZD dribbles lower on reduced risk appetites after ratings warnings

By Mike Jones The NZD/USD has begun the week much as it began the last, consolidating around 0.7000. Currency markets have been a little whippy early in the week as uncertainty about sovereign risk has seen investors’ appetite for risk fluctuate. Hopes the Eurozone would stump up with financial aid for Greece provided initial support to ‘risk sensitive’ currencies like the NZD yesterday. Weekend press reports suggested a support package worth €25b was in the offing, pitching NZD/USD above 0.7050. However, highs around 0.7050 didn’t last long for NZD/USD. Indeed, the NZD dribbled lower through most of the night as risk appetite came off the boil. Finance ministers from both France and Germany poured cold water on the idea of financial support for Greece, and a report from ratings agency Moody’s suggested risks to the US and UK’s AAA ratings have grown, further unnerving investors. Our index of risk appetite (which has a scale of 0-100%) slipped from 70% to 68.3%. Deteriorating risk appetite took a toll on equities and commodity prices. Global equity indices posted falls of 0.5-0.9% and the CRB index (a broad measure of commodity prices) declined about 1%. Against this backdrop, investors trimmed positions in ‘growth sensitive’ currencies like the NZD in favour of ‘safe-haven’ currencies like the USD, and NZD/USD soon drifted back towards 0.7000. Our short-term valuation model suggests NZD/USD is undervalued at current levels. We suspect a move into the estimated ‘fair-value’ range of 0.7100-0.7300 is likely in coming weeks, in the absence of worsening concerns about European sovereign risk. In the short-term, a daily close above 0.7070 is needed to signal an upside breakout of NZD/USD’s recent 0.6950-0.7100 range. For today, the RBA Board Minutes (due 1:30pm) will be scrutinised for clues on whether the March rate hike was a close call. If so, markets may price less chance of another RBA rate rise in April (current pricing currently implies a 40% chance). The USD strengthened against most of the major currencies overnight, unwinding all of Friday’s declines. After climbing steadily towards the end of last week, investors’ risk appetite slipped last night. The VIX index (a measure of volatility on the S&P500 used as a risk aversion proxy) roared back to 18.5% and global stock markets posted modest losses. The Shanghai index fell 1.2% to 5-week lows, European bourses edged 0.6-0.9% lower and the S&P500 is currently down 0.5%. Against this backdrop, investors returned to the relative ‘safe-haven’ of the USD and JPY. Unnerving investors yesterday afternoon, ratings agency Moody’s released a report saying that the risks of the US and UK losing their AAA ratings have grown, although they remain safe for now. Hopes for a bailout package for Greece were dashed once again. Weekend news articles suggested a package of up to €25b was close to being announced. Instead, European Commission representatives suggested European finance ministers are working on a framework for “coordinated assistance”. As earlier optimism was unwound, EUR/USD drifted from 1.3750 to nearly 1.3660. Not to be outdone, GBP/USD slumped around 1½ cents, from 1.5200 to below 1.5050. The UK Rightmove house price index was a tad disappointing, falling to 5.3%y/y in March from 6.1% in February. Meanwhile, outgoing Bank of England policymaker Barker said the UK economy may contract again for one quarter but is unlikely to return to recession. Overall though, political uncertainty continues to be the greatest weight on GBP. Recent political polls still suggest an indecisive result in the UK’s upcoming election. As such, we expect GBP will continue to struggle in the lead up to the election (most likely in May). Looking ahead, Wednesday morning’s (NZT) FOMC meeting will likely dictate near-term direction for the USD. The Fed is expected to upgrade its assessment of the US economy slightly and confirm MBS and Agency debt buying will finish at the end of March. If any additional policy ‘normalisation’ steps are announced, further gains in the USD are likely. Today’s Bank of Japan meeting (decision released tomorrow) should be more exciting than usual. The JPY has suffered of late from speculation the BoJ will increase its asset purchase scheme to stave off deflationary pressures. If the BoJ fails to deliver, expect a bounce in JPY. We’re also likely to see more headlines dribble out of the Eurozone finance minister’s meeting currently underway, which could cause more volatility in EUR. Near-term support on EUR/USD is eyed on dips towards 1.3600. Resistance is at 1.3780. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here