Opinion: NZ$ drifts lower as risk appetites wane amid Euro debt crisis

By Mike Jones The NZD has continued to drift lower over the past 24 hours. After starting the week around 0.7300, NZD/USD has slipped back to around 0.7150. The NZD was largely off the radar last night as worries about the health of the Eurozone remained firmly in markets’ focus. Not only is public opposition to Greece’s deficit slashing plans mounting (three people were killed in protests overnight), but markets are increasingly worried about contagion to the rest of Europe. Several European leaders warned off this risk overnight, including German Chancellor Merkel. Making matters worse, ratings agency Moody’s put Portugal on watch for a possible downgrade. Mounting concerns over the health of the Eurozone has seen investors’ appetite for risk plummet. Our risk appetite index (which has a scale of 0-100%) has slumped to 47%, from as high as 74% only a fortnight ago. Sliding risk appetite took a heavy toll on equities and commodity prices last night, and this weighed on ‘growth-sensitive’ currencies like the NZD. NZD/JPY skidded from above 68.00 to almost 67.00 and NZD/USD drifted off to around 0.7170. Still, it’s worth noting that the NZD has held up fairly well so far as the European debt crisis has unfolded. Indeed, on a trade-weighted basis, the NZD remains around 2-year highs. And against the ailing EUR, the NZD has pushed up to fresh 2½ highs above 0.5550. We suspect the weakening EUR trend has a ways to go yet, so brace for further gains in NZD/EUR in coming weeks. While the focus for offshore markets will remain on the escalating European sovereign debt crisis, in the short-term the NZD will take its cues from a couple of local events. A speech from RBNZ Governor Alan Bollard at 10am will likely expand on the Bank’s recent OCR statement. But those looking for a clear steer on whether the first OCR hike will come in June or July will probably be disappointed. The key event for the NZD will be the Q1 Household Labour Force Survey, released at 10:45, which may well swing the June/July balance for the RBNZ’s first hike. 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. For the record, we are forecasting a 7.2% outturn for Q1 compared with 7.3% in the previous quarter. Market pricing is consistent with a roughly 75% chance of an RBNZ hike in June. So if today’s HLFS disappoints, expect a paring of RBNZ tightening expectations and some slippage in the NZD. Solid support is eyed on dips towards 0.7110. Near-term resistance will be found around 0.7230. Majors The “safe-haven” currencies of the USD and JPY were again the star performers overnight as the escalating European sovereign debt crisis kept appetite for risk subdued. The risk of contagion from Greece to other troubled European sovereigns appears to be growing. Indeed, ratings agency Moody’s last night put Portugal’s sovereign rating on review for possible downgrade. European leaders also appear increasingly nervous about the risk of contagion. German chancellor Merkel last night warned a failure to address the Greek situation could spark a “chain reaction in the European and international financial system” – sentiments that were backed up with similar rhetoric from IMF chief Strauss-Kahn and EU Commissioner Rehn. Not only are investors worried about contagion, but protests against Greece’s planned austerity measures have stepped up a gear. Three people were killed in demonstrations overnight. Reflecting the deterioration in the European debt crisis, the EUR continued to plunge and global stocks fell for the second straight day. EUR/USD fell to fresh 12-month lows around 1.2800, to be down almost 4% for the week. The DAX dropped 0.8%, the FTSE fell 1.3% and the S&P500 is currently down around 0.8%. The cost of insuring Spanish and Portuguese debt through the CDS market spiked to record highs. Against a backdrop of renewed fears over the health of the Eurozone, investors took shelter in “safe-haven” currencies like the USD and JPY last night. US Treasury yields rose 5-6bps. Meantime, plunging global stocks and commodity prices (Oil prices slipped over 3% to US$80/barrel) saw “growth-sensitive” currencies sold heavily. USD/JPY fell from 95.00 to 93.50, EUR/JPY slipped 2.5% to nearly 120.00, and AUD/JPY dipped below 85.00. In contrast, GBP/USD was relatively insulated from last night’s carnage, tracking a sideways 1.508-01.5170 range. As a result, EUR/GBP skidded to fresh 9-month lows below 0.8500. Confidence in the UK economic recovery was shored up by the relatively upbeat April construction PMI, which jumped to 58.20 (53.2 expected). Tonight’s UK election will set the tone for the GBP in coming months. If the Conservative party manages to secure a majority (which is looking fairly unlikely), we’d expect a sizeable GBP relief rally and further sharp declines in EUR/GBP. *All of the research produced by the BNZ Capital team of economists is available here