Check to risk-rally finally comes
The reaction to the risk-accumulation of earlier weeks came last week. Prices were down across a number of asset classes, including the NZD, and the JPY was up. This is likely, though, to be a check in the rally rather than a full-scale return to the pessimism of earlier this year.
The bad news does continue – Eurozone GDP down 2.5% in the March quarter – but the forward-looking economic indicators still point to improvement ahead, or at least stabilisation. Meanwhile US corporates continue to report lower earnings but not generally as bad as feared. This theme of “things are bad but are not getting any worse” is likely to be repeated this week: declining GDP in Japan but stabilising housing markets in the US and improving sentiment in Europe. Keeping downward pressure on markets for now is likely to be anticipation of General Motors in bankruptcy.
The local markets have stayed with the global trends and appear likely to do the same this week.
There are two currency trends of note for the NZD. First, for all the talk of green shoots, the major three currencies remain largely range-bound. Once again people were keen to sell EUR/USD when it approaches $1.38 (hence the NZD/USD recent peaks in the low 60s this year). There would be nothing unusual about the EUR/USD sliding another 1-2%; hence a NZD/USD around 57.5c is possible near-term.
The second trend is the gradual strengthening of the AUD. There is little to suggest this trend has ended. It is likely to resume once equity markets start rising again. And it could resume without an equity market rally should, as will happen eventually, the currency-equity correlation ceases. An upward trending AUD will drag the NZD generally higher (although not the NZD/AUD).
In sum, look for buying opportunities for the NZD.
