Opinion: NZ$ strengthens over 72 USc as relief washes around globe...for now

By Mike Jones The NZD has started the week on a firm footing. A modest recovery in risk appetite over the past 24 hours has seen NZD/USD climb back above 0.7200, after ending last week around 0.7150. The EU swung into action yesterday to prevent further escalation in the sovereign debt crisis. The EU and the ECB announced a range of measures (see opposite) designed to ease refinancing pressure on debt laden European sovereigns and restore order to European debt markets. Market reaction was resoundingly positive. Global equities soared 3.0-10.0%, EUR/USD bounced off its lows, and strains in money markets appeared to ease. Our risk appetite index (which has a scale of 0-100%) recovered to around 38%, from 33.5% on Friday. Against a backdrop of surging equities and improving risk appetite, “safe-haven” positions in the USD and JPY were trimmed and “growth-sensitive” currencies like the NZD outperformed. NZD/JPY climbed from 66.00 to nearly 68.00 and NZD/USD ground up to almost 0.7300. A rebound in global commodity prices (the CRB commodity price index is up around 1.6%) also supported NZD sentiment overnight. Still, it wasn’t all plain sailing. Not only did ratings agency Moody’s suggest it may yet downgrade Greece to “junk” status, but murmurings of disagreement amongst some of the ECB members began to surface. As some of the earlier optimism was unwound, EUR/USD slipped from 1.3000 to below 1.2800 and NZD/USD drifted back towards 0.7200. Looking ahead, we suspect developments in Europe will continue to provide most of the direction for the NZD this week. While the EU’s support package has soothed immediate fears of contagion from the Greek crisis, market sentiment remains fragile. Still, last night’s tentative recovery in risk appetite is expected to limit NZD/USD dips to around 0.7150 in the short-term. Initial resistance is eyed towards 0.7300. Data-wise, keep an eye on today’s ECT data at 10:45am and the April Chinese data dump at 2pm. Majors European leaders pulled out all the stops yesterday to restore calm to financial markets. Policy makers announced a hat-trick of initiatives to counter escalating fears about contagion from the Greek fiscal crisis. First, the EU Commission announced it will set up a €750b facility of loans (€60b), loan guarantees (€440b), and IMF funding (€250b), to help needy countries (Greece, Portugal, Spain etc.) finance their budget deficits. Second, the ECB will begin ‘sterilised’ purchases of government and private debt in “dysfunctional” markets (not to be confused with quantitative easing). Lastly, the US Fed reactivated emergency USD swap lines with the ECB and other major central banks in an effort to ease pressures in short-term money markets. The stabilising effect on market sentiment and risk appetite was immediate. EUR/USD rebounded back above 1.3000 and global equity markets bounced strongly. European stocks post their biggest one-day rise in 17 months. The Euro Stoxx 50 soared over 10%, while US stocks are currently up 3.0-3.5%, unwinding around half of last week’s sharp declines. The rescue package also had the expected effect on European borrowing costs. Indeed, the 10-year Greek-German bond spread almost halved to 480bps from 960bps the day before. The VIX index (a proxy measure for risk aversion) plunged from 40% to 30%. And improving appetite for risk saw investors cautiously dip their toe back into “risk-sensitive” currencies like AUD, CAD and NZD, as “safe-haven” positions in the USD and JPY were unwound. USD/JPY rose from 92.00 to nearly 93.50, AUD/USD climbed back above 0.9000 and USD/CAD fell from 1.0350 to 1.0260. GBP/USD joined the fray, rising from 1.4850 to nearly 1.5000. However, news that the UK Liberal Party will open coalition talks with Labour saw these gains quickly unwound. We remain of the view a Conservative-Liberal coalition would be the most GBP-positive scenario to emerge from the UK’s hung parliament. The Bank of England’s decision to keep rates unchanged at 0.5% last night was expected, and hence ruffled few feathers. Looking ahead, the EU’s rescue package seems to have soothed immediate fears of a spreading of the European debt crisis. The associated gains in risk appetite are expected to keep ‘growth-sensitive’ currencies perky in the short-term. However, market sentiment is still fragile and the Eurozone’s structural issues, including whopping budget deficits, still need to be addressed. As such, we suspect rallies in EUR/USD towards 1.3050 will encounter stiff resistance in the short-term. *All of the research produced by the BNZ Capital team of economists is available here