Since our last report on Thursday, the NZD/USD has spent most of its time consolidating in a 0.8300-0.8380 range. Still, this was enough for the NZD to take out the title of strongest performing currency last week.

A weaker USD and buoyant global risk appetite are the two key factors underpinning the NZD/USD at present. And, on Friday, it was a similar story.

A blockbuster US employment report (see majors) ultimately weakened the US dollar, as rising equity markets and buoyant global growth sentiment sapped the USD's "safe-haven" appeal.

As a result, the NZD/USD squeezed up to a fresh 5-month high of around 0.8380.

While "growth-sensitive" currencies like the NZD and AUD are flying high on rising risk appetite, EUR sentiment has started to deteriorate again as Greece edges closer to a sovereign default. Reflecting these contrasting fortunes, the NZD/EUR surged last week, to reach an all-time high of 0.6385 by Friday. This leaves us fairly comfortable with our call for NZD/EUR to peak around 0.6500-0.6600.

For clues on NZD/USD direction this week, let's re-examine the near-term drivers of the currency:

Fundamentals. These strengthened last week as an increase in global risk appetite more than offset a small fall in NZ commodity prices and steady NZ-US 3-year swap differentials.

Market positioning. The speculative community increased its net NZD long position for the 6th straight week last week, to a net 15k contracts. Still, NZD long positioning is not yet what we would regard as "extreme".

Momentum/Technicals. Our momentum model will remain long NZD/USD while the currency trades above 0.8041. Technically speaking, the NZD/USD is still in an uptrend, but the daily RSI suggests it is marginally "overbought".

Putting it all together, NZD/USD fundamentals have improved, but the extent of recent gains means the currency is looking overstretched. As a result, we expect to see a bit of sideways consolidation this week.

The labour market features prominently in this week's local data. Today's QES figures will probably be overshadowed by Thursday's HLFS survey. For this, we're expecting a 0.4%q/q (1.9% y/y) gain in employment and a slight moderation in the unemployment rate, to 6.4%. The market, and the RBNZ, is looking for 6.5%. For today, markets should remain quiet ahead of the RBA rate decision at 4:30pm (NZT). A 25bps rate cut is roughly 75% priced in. The risk is the RBA holds the line, sending the AUD and, by association, the NZD rocketing higher.

Majors

Sentiment towards the USD has stabilised over the past couple of sessions.

Friday's US non-farm payrolls figures surprised even the most bullish analyst. 243k jobs were added in January (140k expected) with net positive revisions of 165k over the past year. The US unemployment rate dropped from 8.5% to 8.3% (steady expected).

Investors' knee-jerk response was to buy the USD. The 10bps surge in 10-year US Treasury yields following the data certainly bolstered the yield appeal of the greenback.

However, the USD struggled to hold onto its gains. The brightening global growth outlook saw equity markets climb (the S&P500 closed up 1.4% on Friday) and risk aversion ease. Before long, investors began lightening positions in "safe-haven" assets such as the USD.

The overnight trading session was all about Greece. All eyes were on Greece's self-imposed deadline for further cuts to govt spending to be agreed upon. This deadline came and went, and was then moved to Tuesday. Agreement on the PSI deal (a debt swap that would see Greek sovereign debt halved) is also yet to be achieved.

The constant delays and negative comments from European leaders piqued concerns Greece will not meet the necessary conditions for more bailout funds. Investors' frustration on this front was reflected in modest declines in global equity markets overnight (the Eurostoxx and Dow Jones both fell 0.3%) and a lower EUR. Indeed, the EUR/USD has shed around a cent since Thursday (but appears to be squeezing higher this morning).

For this week, more Greek nervousness and political hand wringing is likely to spur more volatility in the EUR and high-beta currencies like the AUD and NZD. With the EUR still priced for a benign outcome (spot of 1.3100 vs. long-run equilibrium of 1.2000), downside risks would appear to predominate.

This week is also a big one for central bank meetings. The RBA is expected to cut today, with the BoE also expected to ease on Thursday with another ?50-75b in asset purchases (quantitative easing). The ECB is expected to hold rates at 1%, but retain its clear easing stance. Should central banks deliver the stimulus expected, this would be seen as a positive for global growth, perhaps helping to offset some of the negativity around Greece. The stage is set for another volatile week in currency markets.

Fixed Interest

The NZ swap curve ended the week a little flatter, ahead of the national holiday yesterday. Friday's US payroll data saw global long yields surge. NZ will play catch-up today.

Last week, there was little to change market expectations for no action from the RBNZ in the year ahead. This kept short-end yields contained. However, some pullback in long-end yields, following offshore moves, saw the swap curve flatten. The 2s-10s curve closed at 130bps, close to late 2011 lows.

NZ long-end bond yields also closed down on the week, with 10-year yields flirting with December lows. The yield on NZGB21s closed at 3.77%.

However, early Saturday morning, markets were hit by stellar US payroll data closely followed by the non-manufacturing ISM (56.8 vs. 53.2 expected). US and German 10-year yields gapped higher on the first release, as their "safe haven" appeal faded. 10-year yields jumped from 1.82% to 1.92%, currently trading at 1.90%.

As a result, the NZ-US 10-year yields spread moved from the upper edge of its range at 2.05% last week, to the lower edge of its range (1.86%) currently. Similarly, a 12bps surge higher in AU 10-year yields yesterday has seen the NZ-AU spread fall to -7bps. This is now at the bottom of its range, having been at 15bps a week ago.

We therefore expect NZ long yields to rise to play 'catch-up' when the market opens today, after the Waitangi day holiday. Curve steepening is expected.

Across the Tasman, the RBA announces rates today. We expect a 25bps cut. In the week ahead, continue to look out for headlines from the Greek PSI negotiations that continue to drag out. Also look out for rate announcements from the Bank of England and ECB on Thursday.