NZD outperforms

NZD has been the best performing major currency so far this year outshining other currencies by a wide margin. We expect further NZD/USD appreciation, albeit at a much more gradual pace over the coming months.

The kiwi has been propelled higher by a host of positive economic indicators including jobs data which has revealed an improving trend against the background of strengthening consumer and business confidence.

Economic growth is on track to reach our forecast of 3% this year. Additionally supportive of the NZD is the fact that NZ’s major commodity exports especially dairy products have remained high. NZD will also be helped by a likely healthy reading for Q4 GDP expected to come in at 3.7% YoY on Thursday.

NZD/USD looks set to target the 2013 high of 0.8676 as the next key target, a level that will provide strong resistance.

Why the JPY will weaken

While I continue to forecast JPY weakness over the coming months the JPY is currently being buffeted by various forces. Elevated risk aversion has limited the downside for JPY as the currency has once again found a safe haven bid although it has weakened as risk appetite improved slightly overnight.

Going forward, I expect US Treasury yields to move sharply higher as the US economy gains momentum and loses the shackles of bad weather, pressurising USD/JPY higher. Additionally likely further easing by the BoJ in April / May will contribute to downward pressure on the JPY.

Separately Japan has shifted from possessing a relatively strong broad basic balance surplus (current account + direct investment + portfolio flows) to a deficit, a factor that will undermine the JPY over the coming months.

Risk appetite firms

Despite the decision by Crimea’s parliament to formally request accession to Russia markets risk assets performed well overnight, with US and European equity markets registering solid gains. Consequently US yields rose overnight while the USD made gains against safe haven currencies.

Market relief probably reflected the fact that the referendum itself passed without violence while the reaction by the West in terms of sanctions was not seen to have a particularly detrimental impact on sentiment.

China’s decision to widen its currency band also passed with little fanfare given that such a move was largely anticipated. There will be some positive pass through into the Asian session from the gains in asset markets overnight although a degree of caution continues to be warranted given the still precarious situation in the Ukraine and ongoing tensions between Russia and the West.

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