Opinion: NZ$ rises on stronger global risk appetite and positive local data

By Mike Jones The NZD has been the strongest performing currency over the past 24 hours. After a gallop higher yesterday morning, the NZD/USD spent the overnight session consolidating around 0.7000. Yesterday’s Q4 GDP indicators were a clear reminder of the NZ economic turnaround we believe is brewing. Indeed, the manufacturing and construction results were each clearly better than we expected. All told, yesterday’s numbers bumped up our production GDP growth estimate to 0.8%, from 0.4% (official GDP figures are due for release on 25 March). The stronger data saw short-term speculative players and leveraged accounts scramble to cover short NZD/AUD positions, given the extent of bad news priced into this currency in recent weeks. NZD/AUD was squeezed up from 0.7660 to nearly 0.7700, helping NZD/USD push up to nearly 0.7000. Supporting gains in NZD/USD, NZ-US 3-year swap spreads widened 5bps to 291bps yesterday. Overnight, currency markets struggled a bit for direction. Still, easing fears over the fiscal health of European sovereigns kept investors’ risk appetite humming. Most notably, the head of the IMF said Greece’s problems are unlikely to spread to the rest of Europe, which helped European sovereign credit spreads narrow further and ‘risk-sensitive’ currencies like the NZD extend their gains. AUD/USD found fleeting support from Royal Dutch Shell’s A$3.3b offer for Australia’s Arrow Energy, which saw NZD/USD briefly flirt with highs around 0.7030. We remain of the view dips in NZD/AUD and NZD/USD will be limited in the lead up to the RBNZ’s monetary policy decision on Thursday. For today, we suspect improving confidence about the global recovery will keep NZD/USD supported on dips towards 0.6900. It’s been a relatively quiet start to the week in currency markets. For the most part, the major currencies tracked familiar ranges last night, with little in the way of data to provide direction. The USD started out the night on a softer footing. Easing fears about European sovereign solvency kept risk appetite elevated and EUR extended its recent gains. IMF chief Strauss-Kahn said Greece's financial problems were unlikely to spread to Spain or Portugal. Meanwhile, Portugal announced plans to cut its deficit to 2.8% of GDP in 2013 from 8.3% this year. Portuguese 5-year CDS spreads (a measure of implied default probability) have now halved from their peak of 245bps on 8 February. EUR/USD ground up to a smidge below 1.3700, paving the way for a weaker USD and more broad-based gains across the major currencies. This was despite slightly weaker than expected German industrial production data for January (0.6%m/m vs. 1.0% expected). The latest IMM data shows the speculative community trimmed their record EUR short position by around 7% last week. Still, it wasn’t long before the USD came bouncing back, led by sharp falls in GBP. GBP/USD plunged from 1.5160 to 1.5040, weighed down by rumours of a possible Moody’s downgrade for the UK. Combined with a slump in commodity prices (most notably gold and oil), this saw EUR, AUD and CAD pare their earlier gains. EUR/USD slid from above 1.3680 to 1.3620 and AUD/USD eased back to 0.9080, having initially scaled 1½ month highs around 0.9130. It’s worth noting, speculation is mounting that the PBOC could soon abandon the Yuan’s effective US dollar peg, which has been in place since mid-2008. This follows comments from PBOC Governor Zhou that the peg is a “special” policy designed to weather the global financial crisis, suggesting it is a temporary measure only. 12-month non-deliverable USD/CNY forwards hit a 5 week low of 6.63 yesterday (implying a 2.8% depreciation from the current USD/CNY spot rate of 6.82). Looking ahead, with risk aversion lifting and confidence about the global recovery improving, we suspect further downward pressure on the USD and JPY may be in store this week. While the Greek crisis is by no means over, it does appear we are past the worst. In the short-term, rallies in the USD Index towards 81.30 are likely to attract sellers. While this week’s global data calendar is comparatively light, watch out for more Fed speakers stressing the need for interest rates to remain low for “an extended period.” * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here