It's been a snoozy start to the week for the NZD. With US markets on holiday and European markets quiet, currency markets took a breather overnight.

The NZD/USD tracked sideways in a 0.7920-0.7960 range.

A fairly sanguine response from European markets to Friday's swathe of downgrades (see Majors) helped steady investors' risk appetite. Combined with modest gains in commodity (read: oil) prices, this provided a small boost to the NZD/USD late in the overnight session. Nevertheless, it wasn't enough to propel the NZD/USD out of the 0.7870-0.7980 range that has contained the currency for the past week.

Looking ahead, a big day of data and event risk might spur a bit more volatility in the NZD today.

We expect today's NZIER Quarterly Survey of Business Opinion (released at 10am) to have softened a bit from three months ago and to paint a picture of steady, rather than strong, economic growth. Forty five minutes later, we're picking a weakish 0.5% fall (market -0.2%) in December's electronic card transactions, essentially an elongated hangover from the Rugby World Cup. If today's NZ data is about as subdued as we expect, it's unlikely to trigger a test of NZD/USD resistance at 0.7980.

However, we'll also be watching closely a trifecta of Chinese economic data releases at 3pm. These probably have more potential to influence the NZD on the day. Chinese retail sales and industrial production for December are forecast to show only a very marginal slowdown in annual growth rates (to 17.2% and 13.8% respectively), but the Q4 GDP release is expected to show a more marked deceleration to 8.7% from 9.1%. Watch for any unexpected softness. This would see hopes of aggressive Chinese policy stimulus bubble up again, providing a boost to growth sensitive currencies like the NZD and AUD.

Majors

Currency markets barely budged overnight. US markets were shut for Martin Luther King Day, and European markets were starved for news. As a result, most of the major currencies simply shuffled sideways in tight ranges. The USD spent the evening dribbling marginally lower.

European markets' reaction to Friday's swathe of sovereign downgrades was notably muted. In fact, European equity markets posted gains of 0.4-1.3% overnight (S&P500 futures are currently up around 0.5%) and most European sovereign bond yields actually fell slightly (see Fixed Interest).

Soothing comments from policy makers may have helped cushion the impact of the downgrades. Chinese Premier Wen said "the crisis will eventually pass and prosperity will arrive". Meanwhile, the EU's Almunia suggested the size of the European bailout fund could be increased. In addition, the ECB was reported buying Italian and Spanish bonds in the secondary market.

The EUR spent the night licking its wounds after Friday night's trouncing. The EUR/USD ground up from 1.2630 to 1.2670. However, EUR/JPY continued to head lower - to 11-year lows a smidge above 97.00 - prompting a bit of jawboning from Japanese finance minister Azumi. The threat of BoJ intervention means traders may now be more cautious in taking EUR/JPY lower.

The CAD was the star performer of the night, thanks to a near 1% bounce in oil prices (to US$99.60/barrel). From above 1.0240, USD/CAD soon slipped below 1.0180.

Worries the European stability fund could lose its AAA rating (following French and Austrian downgrades) and the fragile Greek PSI negotiations remain a drag on the EUR. In the absence of any positive announcement on these fronts, we suspect the path of least resistance for the EUR is down. However, the big wild card in the near-term EUR outlook is still speculative positioning. According to IMM data, the speculative community increased its net short position in EUR to a record 155.2k contracts last week. A sharp paring of this position could spur a vicious (but temporary) squeeze higher in the EUR.

Looking ahead, today's slate of Chinese data looms as the next key test of investors' risk appetite. Resistance on the USD is sighted on bounces towards 81.80 with near-term support at 80.50.

Fixed Interest

NZ swap and bond yields opened down, drifting lower over the course of the day. It was a relatively quiet night offshore.

NZ swap yields fell on the open and failed to hold onto any rebounds yesterday, following on from Friday's European sovereign downgrades. Yields closed down 6 to 11bps, with the curve flattening slightly. The yield on 2-year swaps closed down 8bps at 2.80%.The yield on 10-year closed down 11bps, with the 2s-10s curve at 134bps.

The NZ bond curve also moved lower yesterday by around 7bps. The yield on 21s closed at 3.81%, not far from historic lows, but 195bps above US equivalents. The NZ-AU 10-year bond spread has widened to 17bps, as Australian 10-year bond yields declined from 3.85% to 3.67% yesterday.

NZ swap-bond spreads narrowed. 10-year EFP now sits around 34bps.

Offshore, it was relatively quiet given the US holiday. The market appeared to continue to absorb Friday's ratings news without too much hysteria. German 10-year yields were range bound around 1.77%. Non-core European spreads to German bonds were little changed. An exception however, was Portuguese bond yields that did respond to their downgrade, by S&P, to 'junk' status. Portuguese 10-year bond yields spiked from 12.46% to 14.41%, a Euro-era high.

The local focus today will be the NZIER business opinion survey. Expect some consolidation in NZ yields early today, after the quiet night. A slew of Chinese data releases provide risks this afternoon, for a market wary of the effects of European recession spreading to Asia. The key drivers offshore tonight will be the German ZEW survey, and Eurozone CPI and US Empire manufacturing data.