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BNZ Currency Reports

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Fuseworks Media
BNZ Currency Reports

NZD

The NZD was the strongest performing currency last week. Indeed, widening NZ-US interest rates spreads propelled NZD/USD to 3-month highs above 0.7300 on Friday.

Investors' appetite for risk hit a stumbling block last week. The European sovereign debt crisis deteriorated following sovereign downgrades of Greece, Portugal and Spain.

At the same time, the US Senate's grilling of Goldman Sachs over its role in the US sub-prime housing debacle provided headwinds for US stocks.

The MSCI World Equity Index tumbled 2.2% last week and our risk appetite index (which has a scale of 0-100%) slipped to 57.6%, having started the week around 74%. The slide in global equities and deteriorating risk appetite prompted investors to trim positions in most 'growth-sensitive' currencies last week.

However, the NZD was singing from a different song book. Confirmation from the RBNZ last week that interest rates are set to rise "over coming months" spurred strong appetite for the NZD, particularly against low yielding currencies such as EUR and JPY. NZD/JPY climbed from 67.50 to 6-month highs around 69.00, while NZD/EUR surged to fresh 2 highs above 0.5500. Meantime, NZD/USD rose above 0.7300 for the first time since January, amid a marked widening in the NZD's yield advantage. NZ-US 3-year swap spreads jumped to 310bps, from 285bps the previous week.

Looking ahead, we expect some consolidation is due for the NZD this week. China raised reserve requirements a further 50bps over the weekend which is likely to suppress gains in 'commodity-linked' currencies early in the week. What's more, market pricing is now consistent with a roughly 70% chance of a 25bps RBNZ rate hike in June. If this week's data fails to impress, expect a paring of RBNZ tightening expectations and some slippage in the NZD. We're also cognisant of the downside risks facing NZD/AUD from a RBA rate hike on Tuesday. Markets are pricing around a 60% chance of such, which looks a little light to us.

Most important in this week's data schedule will be Thursday's HLFS. Its jobless rate could "technically" reverse some of Q4's spike to 7.3%. But if the unemployment rate goes up any further it would seriously question the case for an OCR hike as soon as June.

This week's moves aside, the renewed NZD uptrend we have been warning of for some time appears to be upon us. We suspect further NZD/USD gains are likely in coming weeks as long as a) RBNZ rate hikes remain on track, b) commodity prices keep pressing higher, and c) the NZ economic recovery continues. Against this backdrop, we continue to favour a buy on dips approach for the NZD/USD. Solid support is eyed towards 0.7160.

Majors

The USD weakened against most of the major currencies on Friday. However, over the week, the USD increased around 0.5% on a trade-weighed basis. After falling for most of the week, the EUR stabilised on Thursday and Friday. Greece's announcement on Friday of a further "32b in austerity measures boosted optimism Greece would be able to avoid default and European leaders would stump up with a larger aid package.

After reaching 12-month lows of almost 1.3100 on Wednesday, EUR/USD finished the week closer to 1.3300. Greek-German 10-year bond spreads closed out the week around 600bps, having hit an all-time high of nearly 700bps around the middle of the week. Over the weekend, Eurozone finance ministers indeed approved a new rescue package for Greece. The package is thought to be worth around "120b - by far the largest ever sovereign bailout - and will cover most of Greece's borrowing needs for the next 3 years. While the package is unlikely to be officially confirmed until next week, we suspect a paring of EUR shorts early in the week will keep EUR/USD supported above 1.3250 in the near-term.

Global stocks ended last week on a fragile footing. The S&P500 fell 1.7% on Friday to finish the week down around 2.5%. Not only was Friday's Q1 US GDP data a touch worse than expected (3.2% annualised, vs. 3.3% expected), but bank stocks were weighed down by the ongoing US Federal probe into Goldman Sachs' securities dealings. US financial stocks fell 3.9% over the week.

The VIX index (a proxy for investors' risk aversion) jumped from 16.5% to almost 23% last week. Rising risk aversion saw investors shun 'risk-sensitive' currencies like AUD and CAD last week in favour of 'safe-haven' currencies like the USD and JPY. Reflecting this sentiment, gold prices surged to 4-month highs above US$1180/ounce and US 10-year Treasury yields slumped 16bps to 3.65%. The PBOC raised Chinese commercial banks' reserve requirements by 50bps over the weekend, the third such increase this year. This may offset part of the optimism surrounding Greece's new bailout package early this week.

The week ahead is chock full of event risk. The UK election on Thursday will have clear implications for GBP. If the Conservative party manages to secure a majority, expect GBP/USD to soar. Elsewhere, the RBA and ECB are due to meet, with a 25bps hike and no change in policy rates expected, respectively. Data-wise, US non-farm payrolls on Friday will be the highlight, but with the US ISM manufacturing index and European PMIs also in focus.

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