OUTLOOK

CURRENCY: Expect further familiar ranges with a bias to the topside as NZD strength is assisted by the EUR and AUD moves. USD fortunes appear muted as the markets await the US FOMC meeting results later this week.

RATES: Expect local bond and swap markets to open broadly unchanged. Australian and US rates were volatile, but ended back where they started.

Review

CURRENCY: The stronger EUR pushed the NZD back towards the familiar resistance level of 0.7050. It was unable to break through this but has remained close to start off this week.

GLOBAL MARKETS: Major European bourses closed unchanged or higher. Stronger US retail sales data saw equities rally and bind yields move higher. However, early optimism didn't last - bond yields rallied back and the Dow closed up only a few points. There was similar price action in commodities, which rose initially only to close unchanged. Gold and oil both fell.

Key Themes and Views

US DATA SURPRISES ON THE STRONG SIDE. U.S. retail sales rose unexpectedly last month despite heavy snow storms and a drop in vehicle purchases by consumers spooked by Toyota recalls, bolstering hopes of a sustainable economic recovery. Sales rose 0.3%, led by gains across the board. However, there were downward revisions to both the headline and core measures in January, but the overall surprise was to the upside. Canadian jobs data were also strong, adding to the positive tone.

Domestic data doing little to lift the tone. Friday's NZ housing and retail sales data was surprisingly soft, and has done nothing to talk us out of our call for a September start to the tightening cycle. We had expected core (i.e. ex auto) retail sales to put in solid bounce in January following December's 1.8% fall, but in the event, sales grew just 0.3%, and December's fall was revised to a -2.0% fall. The recovery is on track, but it is being held back by a desire to de-leverage, the steep yield curve, and tax uncertainty, all of which suggest that the RBNZ has less work to do when it finally starts raising rates.

Overnight Comments/Events

Chinese Premier Wen Jiabao says currency not undervalued. He said "I don't think the renminbi is undervalued", going on to say "we oppose countries pointing fingers at each other and even forcing a country to appreciate its currency". Wen also said the US should "take concrete steps to reassure investors" about the safety of the dollar." This debate is not over yet - the US still insists China's currency is too low.

PBOC Governor Zhou Xiaochuan dismissed speculation that higher inflation has altered the Bank's policy plans. Figures released last week showed that annual inflation rose to 2.7% in February. Zhou said that while data "are a bit higher than our forecasts, but not much higher, and we can still act according to our plans".

ECB President Trichet says that rating agencies will be impressed with Greek austerity plans. He said that "at this stage my working assumption is the Greek government decision will be convincing", adding that additional measures were "convincing and courageous". NZD: Different tack

Having survived tests of the downside throughout last week the NZD should begin anew. Support will take many forms not the least of which will be a weaker USD and stronger EUR as well as natural demand from all quarters.

Expected Range: 0.6976 - 0.7050

NZDAUD: Protest

Any discussions around a single entity or currency for that matter should not influence reality. This cross needs fresh momentum in order to create new lows. RBA speeches and minutes of the previous Board meeting may just help the cause but plenty of profit taking from recent positions will cushion such a move with 0.7583 unlikely to break in the short term.

Expected range: 0.7622 - 0.7692

NZDEUR: Left port

Markets finally pushed the EUR higher against the USD after poor consumer confidence data was not enough to out weigh the positive US February retail sales release. The NZD should struggle to keep pace with the moves of the EUR and this cross should weaken as a result.

Expected range: 0.5078 - 0.5118

NZDJPY: Sinking feeling

With discussions in Japan of further quantitative easing surely the JPY will weaken further. This should see this cross again test the 64JPY resistance level but perhaps not today.

Expected range: 63.00 - 64.00

NZDGBP: Fresh gust

Another burst higher for the GBP that has lowered the boom on recent moves higher for this cross. More of the same can be expected today as this cross heads back towards support at 0.4552.

Expected range: 0.4595 - 0.4629