The Kiwi began last week on a firmer note amid a broad upward correction in risk appetite as the debt problems in southern Europe faded into the background after the EU gave Athens until mid-March to show serious efforts in tackling its fiscal shortfall. The advance was quite orderly and would have likely carrier through the week, but markets were abruptly interrupted mid-week by the US Federal Reserve: Ben Bernanke and company revealed relatively hawkish posture in the minutes from the latest monetary policy meeting, following up on the very next day with a surprise increase in the discount lending rate. Reasonably enough, this pushed the US Dollar broadly higher against the spectrum of major currencies and put the retracement in risky assets on hold.
The surge in the US interest rate outlook did not prove lasting however as Friday brought another about-face after January’s consumer price index figures broadly disappointed, with core inflation (excluding energy and food prices) issuing the first monthly decline in at least 13 years. With the prospects of an imminent Fed rate increase now subdued, the rebound in risk appetite is likely to resume. In fact, considering risky assets were on the way lower long before the Greek issue because the headline reason to be selling, a more meaningful recovery seems necessary before the larger downtrend can resume. Such an outcome is likely to boost high-yielding currencies (NZD included) at the expense of funding ones (Dollar, Yen) as carry trades follow stocks higher. Indeed, the near-term percent change correlation between the average trade-weighted value of the New Zealand unit and the MSCI World Stock Index is now at a formidable reading of 0.79.
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