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NZD starts week on back foot

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Fuseworks Media
Fuseworks Media

The NZD has started the week on the back foot. In fact, the kiwi has been one of the worst performing currencies over the past 24 hours. The NZD/USD shed around a cent overnight, before once again bouncing off pivotal support close to the 200 day moving average at 0.8085.

Creeping nervousness about Europe has undermined risk appetite over the past 24 hours. Political uncertainty, mixed with lacklustre European economic data, has produced a fairly unpalatable stew for global investors. European and US equity markets are a deep shade of red, commodity prices have continued to fall, and risk aversion indicators are rising.

In currency markets, the deterioration in confidence has seen investors shun 'growth-sensitive' currencies like the NZD and AUD in favour of the relative 'safe-haven' of the USD and JPY. NZD/JPY skidded from 66.80 to below 65.00 overnight, helping briefly drag NZD/USD below 0.8100. Speculative and leveraged-type players were noted as sellers amongst our flows.

Late in the night, NZD sentiment recovered somewhat alongside stabilising US equity markets (the S&P500 is currently down around 0.8%, having opened almost 1.4% lower). This means the NZD/USD has managed (by the skin of its teeth) to hold inside the 0.8080-0.8290 range it has traded around for the past 2� months. It seems support at 0.8085 remains a force to be reckoned with.

For today, NZ March net migration and credit card spending figures might get a few local economists excited. But for markets and the NZD, the big data release will be Australian CPI at 1:30pm.

The CPI is the last piece of data that could stand in the way of an RBA rate cut on May 1. Our NAB colleagues reckon a print of 0.8%q/q or above might be enough to stay the RBA's hand. NAB expects 0.5% with the market at 0.6%. Note the market is already 95% priced for a rate cut which may limit market reaction to the CPI figures. After the Aussie CPI (and our ANZAC day break), it's all hands on deck for the FOMC and RBNZ double act on Thursday morning.

We've been calling for a higher NZD/AUD over the past few months (see our strategy note). But with market pricing for RBA cuts now looking a little too aggressive (100bps of easing priced compared to our expectations of 25-50bps), we may see the NZD/AUD struggle to push much higher in the short-term. Near-term bounces may be contained by resistance at 0.7930.


Market sentiment continued to sour overnight, as global growth worries stepped up a gear. In an environment of rising risk aversion, the 'safe-haven' USD and JPY outperformed.

Currencies have been super rangy of late. Global data, while still solid overall, has been a little mixed and inconclusive. This has left markets directionless and investors wondering where the global economy is headed.

Overnight, news on the global economy took a turn for the worse. The focus was firmly on Europe. The weekend's French election result received a frosty reception from investors, as did news that the Dutch government had collapsed over the breakdown of austerity talks. The data wasn't too flash either. The Spanish economy was confirmed as entering recession, and European PMIs for April were downright terrible. The PMIs actually signalled a faster rate of economic contraction in the Eurozone, with weakness in German manufacturing and French services particularly worrying.

Concerns economic weakness could be spreading from the south Europe to the 'core' knocked European equities for six. The French CAC plunged 2.8% and the German DAX slid 3.4%. US stocks are down 0.8-1.0%, with the VIX index (a proxy for risk aversion) jumping from 17.5 to above 20.0.

The toxic mix of stuttering risk appetite and equity market weakness saw investors scramble back to the relative 'safety' of the USD and JPY. USD/JPY slipped from above 81.50 to around 81.00, while the EUR/USD and AUD/USD both shed around a cent, to trade at 1.3150 and 1.0310 respectively.

Looking ahead, tonight's bond auctions from Italy, Spain, and the Netherlands will provide the next test of market sentiment. US new home sales data and the Richmond Fed index will also be worth keeping an eye on.

However, the FOMC meeting on Thursday morning will capture most of the market's attention. Investors' hopes for more Fed quantitative easing have waxed and waned of late in line with a generally mixed bag of data. This has kept the USD relatively range-bound. In recent times, US data has printed a little softer, but we still don't believe QEIII is likely. Overall, we suspect the Fed statement will tow the same cautious line as last time, and retain the (conditional) commitment to keep rates low until 2014. Any signs from the Fed that it is backing away from this commitment (i.e. rates higher earlier) would support the USD, but knock back risk sentiment even further.

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