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NZD drifts lower as risk appetite wanes

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Fuseworks Media
Fuseworks Media

In the absence of any local developments the NZD has drifted lower, as global risk appetite has waned ahead of the Eurogroup meeting on Friday.

The NZD/USD drifted gently lower from 0.8200 last evening, to trade around 0.8170 currently.

However, the NZD has continued to "make hay" relative to the languishing AUD. As the market ramped up expectations of a rate cut in April (see Majors) to 30%, the AUD's interest rate support declined.

The NZ-AU 3-year swap spread has become less negative, moving from -112bps at the start of the week to -99bps currently.

The NZD/AUD climbed from 0.7850 last evening to 0.7870 currently. The cross is now trading at its highest levels since October. Over the medium-term, we see the interest rate differential continuing to move in favour of the NZD as the RBNZ raises the OCR from year end. This underpins our medium-term view of a higher NZD/AUD.

The NZD's fortunes relative to the EUR were not so well-supported. The NZD/EUR was fairly range-bound overnight, but has drifted off from around 0.6160 yesterday morning to trade at 0.6130 currently.

Attention should return to local data today with the release the NBNZ business confidence survey. Having been highly resilient over recent months we expect this March edition to begin to show the impacts of the recent surge in the currency and moderation in export prices. However, there's still a lot else to suggest the survey will remain gutsy, overall. We do not expect there to be too much to disturb the currency. However, the NZD will remain at the whim of any further easing in global risk appetite. Near-term NZD/USD support remains around the 0.8140 level. A break below this level could see the currency revisit solid support at 0.8060.


The USD was supported by a further trimming of risk appetite. The weakest performing currency over the past 24-hours has been the AUD and the strongest the JPY.

Risk appetite lost a little more of its gloss overnight. Our risk appetite indicator (scale 1-100%) slipped to below 64% from above 70% at the start of the week. Whilst a precise catalyst was absent, a slightly more cautious tone appears to be building ahead of Friday's Euro Finance Minister's meeting. The Euro Stoxx 50 closed down 1.10%, and the S&P500 is currently down 0.70%.

The USD gained upward momentum as the evening past, benefitting from the slightly more cautious tone. The release of a disappointing US durable goods orders number for February (2.2% vs. 3.0% expected) only compounded the "safe haven" bid for the USD. The USD index moved up from 79.00 to trade around 79.20 currently.

The AUD's recent fall from favour continued overnight. Comments by AU commentator McCrann that the market was potentially under-pricing the risk of an April rate cut spurred markets. The market increased its expectations for RBA rate cuts in the year ahead from 54bps to 61bps. AU 3-year swap yields fell from 4.4% to 4.3%, reducing the interest differential support for the currency. The AUD declined from 1.0440 last evening to now trade around its lows for the night at 1.0370. A break of the technical support level at 1.0350 would open the way for further downside.

The JPY was one of the only currencies to gain on the USD, as it also benefitted from "safe haven" demand. The USD/JPY has declined from around 83.10 this time yesterday to trade at 82.80 currently.

The GBP was on a fairly steady downward path overnight, after the release of the final print of Q4 GDP that showed the economy contracted 0.3%q/q. The GBP/USD fell from 1.5960 to trade just below 1.5880 currently.

Attention will continue to focus on comments out of the Eurozone ahead of tomorrow's Eurogroup meeting. German unemployment data will also be released tonight, along with Eurozone consumer confidence. On the other side of the Atlantic the "Fed fest" continues with chairman Bernanke scheduled to speak along with Federal Reserve members Lockhart and Plosser.

Fixed Interest

NZ swap yields declined 2 to 4bps across the curve yesterday. The 2-year sits mid-range at 3.07%. We continue to see "fair value" around 3.20%. We also see it well supported on dips toward 3.00%, given an expectation that retail "fixing" flows will continue to hit the market. The 2s-10s curve has flattened slightly in recent days to 147bps as the long end is impacted by the pull-back in US long yields.

NZ bond yields also closed down 2-3bps across the curve. NZ 10-year bond yields at 4.18% now trade at the upper end of their -10bps to 15bps range relative to AU equivalents. This suggests, if AU long yields continue to decline they will likely drag NZ equivalents lower. The DMO announced its tender of 200m of 19s and 100m of 23s, above its required weekly "run rate" to meet its funding needs. We expect demand to be solid if unspectacular.

Overnight, in the backdrop of muted risk appetite and soft equity markets, US 10-year bond yields consolidated around the 2.20% level. German equivalents drifted off from 1.90% to 1.83%. Non-core European spreads widened a little. Despite comments from the Italian PM, Monti that Eurozone woes were "almost over" the market appeared unconvinced. Elsewhere ECB's Weidmann made such comments as, "all the money we put on the table will not buy us a lasting solution to the crisis".

Today, a solid NBNZ business confidence survey should help underpin short-end yields in their current range. The long-end will continue to take its cues from offshore developments. Tonight, we get EU consumer confidence and comments from Bernanke and other Fed officials.

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