Greek default worries are soothed and NZ$ rallies. IMF lowers US growth forecast

By Mike Burrowes and Kymberly Martin

The NZD/USD had the dubious honour of being the best performing currency on Friday, driven higher as concerns about the Greek debt crisis waned and investor risk appetite improved. The NZD/USD ended the Friday trading session up 1%. Very solid demand was noted for both NZD/USD and NZD/AUD from a range of accounts.

NZD/AUD ground steadily higher throughout the evening, rising from 0.7620 to a high of 0.7660. The move higher in the cross was despite the AUD/USD ending the trading session up 0.60%. The NZD also surge 0.75%, 0.80% and 1.05% against the GBP, CAD and CHF respectively. The move higher in the NZD on Friday night was exacerbated by stop-loss buying. In addition some hedging demand was noted through NZD/AUD.

Our short-term “fair value” model for NZD/USD continues to suggest it is overvalued based on fundamentals, although we acknowledge the run up has been driven by very strong momentum. The “fair value” range for NZD/USD has in fact shifted down to 0.7100 to 0.7300 as risk appetite and global growth have waned.

NZD/AUD is now trading at the top of our “fair value” range of 0.7430 to 0.7630. We continue to expect the NZD/AUD to appreciate gradually over the next 18 months as interest rate differentials and relative business confidence move in favour of NZ.

The week ahead sees a steady flow of data. Today we start with the June Performance of Services Index. Shortly after this, we have the release of Q1 Manufacturing Sales and the Wholesale Trade Survey (postponed from last week on account of the Christchurch aftershocks). On Wednesday we have the release of Q1 Current Account. Reinsurance provisions related to the 22 February earthquake will probably be enough to drive the March-quarter (and March-year) into surplus.

Majors

The USD dollar weakened against nearly all the major currencies on Friday. The weakness was led by some tempering in concerns around the Greek debt crisis and a broad based consolidation in risk appetite. Indeed, the VIX (a proxy for risk aversion) dropped to 21.85 from 22.70.

The Greek debt concerns were alleviated by comments from German Chancellor Merkel and French President Sarkozy. The leaders stated their solution is in line with the 2009 “Vienna Initiative” where international lenders agreed to boost credit for Central and Eastern Europe and the main commercial banks committed to maintain exposure and roll-over credit lines. However, no clear solution has been agreed to at this stage.

The comments caught the market off-guard and EUR/USD quickly rallied from around 1.4150 to above 1.4250. The EUR/USD pushed through to a high around 1.4340 in the early hours of the morning as the USD weakened further. Stop-loss buying from a range of accounts was noted amongst our flows.  

The rally in the EUR was supported by further negative USD news. The University of Michigan consumer confidence was weaker-than-expected in June (71.8 vs. 74.0 m/m expected). This adds to the string of recent weak US data. Further supporting the USD weakness were revised forecasts from the IMF. They lowered their forecast for US economic growth and warned Washington and Europe to reduce their deficits immediately.

Looking to the week ahead, expect headlines from various leaders on the Greek debt crisis to take centre stage. Aside from this, we have the FOMC interest rate decision and press conference with Chairman Bernanke early Thursday morning. Markets will be looking for comments about the recent weakness in the US economic data.

In other central bank news, we have the BoE MPC minutes from their last interest rate decision on Wednesday night. Data wise, the Euro zone current account for April is released tonight and the German IFO and US Durable Goods Orders are due on Friday.

Fixed Interest Markets

NZ bond and swap markets ended the week with yields around 10bps lower along the curve. Last week’s Christchurch aftershocks undermined local risk appetite, while negative offshore developments also continued to weigh on yields.

NZ swap yields stabilised on Friday with 10-year yields holding just above 5.0% and 2-year yields at 3.31%. The 2s-10s spread remains around 172bps, as last week saw a parallel move down in the curve.

NZ bond yields continued to fall on Friday, as general risk appetite remains somewhat muted and demand for bonds remains solid relative to contained DMO issuance. At the end of last week the yield on 21s broke below last September lows around 5.0%, a key support level. US 10-year yields also flirted with new recent lows around 2.93%.

Greek issues continue to rumble along. While no firm agreement is yet in sight, Greek bond yields and CDS spreads fell from highs at the end of last week. On Sunday Greece’s newly appointed finance minister stated (perhaps optimistically) that the country remains fully committed to the EU/IMF aid programme and would achieve its targets.

Contagion fears remain however. On Friday Moody’s placed Italy’s Aa2 rating on “negative watch”, highlighting the risk of contagion in the region from Greece’s debt woes. The agency stated that Italy now faces the challenges of “rising interest rates and fragile market sentiment” along with structural impediments to growth.

Locally, Fonterra announced on Friday it would issue renminbi bonds for the first time. This would be the first Australasian corporate to tap the CNH (Chinese yuan deliverable in Hong Kong) market.

The week ahead brings few key NZ data releases, although Wednesdays’ current account balance and credit card spending data will be closely watched. Recent local and off-shore events have taken swap yields some way below fundamental “fair value”, in our view. However an immediate catalyst for meaningfully higher yields is not apparent in the week ahead as off-shore events are likely to continue to weigh on markets.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.