Euro crisis worries ease slightly but sentiment remains fickle

By Mike Burrrowes

NZD

NZD/USD continued to trade in a wide range overnight as  sentiment towards the European debt crisis remains fickle. Early in the evening, NZD/USD dropped below 0.7650, its lowest level since the beginning of April. NZD/USD recovered back to 0.7800 during the night, led by a sharp recovery in the EUR (see below). NZD/USD is currently trading around 0.7770.

Yesterday’s NZ trade balance data for August was weaker-than-expected at -641m (-321m expected). While the annual trade balance remains in surplus, we are getting increasingly nervous that the currently aligned stars may be starting to drift apart. The meat sector looks as if it will remain robust for some time to come but, elsewhere there are sufficient warning signs to make us nervous. In particular, there is increasing evidence that dairy commodity prices have peaked. Indeed, Fonterra’s auction prices are drifting lower, US supply is ramping up and demand from China has dropped over the last few months.

NZD/AUD recovered from below 0.7900 to 0.7950 overnight. While the RBNZ remains the only major central bank expected to lift rates in the next 12-months, expectations have been scaled back further. The OIS market now only expects 20bps of hikes over the next 12 months and is pricing a small chance of a rate cut at the next meeting. In the near-term, we see the risks as skewed to further declines in NZ interest rates relative to Australian interest rates.

Trading on the NZD relative to the EUR and GBP was volatile overnight. NZD/EUR fell below 0.5700 in the early hours of this morning, but has subsequently surged to 0.5770. The price action on NZD/GBP was similar, briefly dropping below 0.4950, but is now trading around 0.5000.

Looking to the day ahead, the only local data due for release is the relatively new National Employment indicator for July. This will give an insight into a labour market we believe to be still ticking along, albeit not picking up the pace just yet. For the day ahead, initial support on NZD/USD is eyed at 0.7690 and resistance at 0.7830.

Majors

Markets remain fixated on the European debt crisis, although little new information has come to hand overnight. There was a modest improvement in sentiment overnight as markets remain hopeful EU political leaders are edging closer towards a credible solution to the crisis. Overall, the USD index has fallen from above 78.60 to 78.40 currently.   

The improvement in risk sentiment overnight was modest, relative to the declines seen last week. The S&P500 and Euro Stoxx 50 index gained 0.9% and 2.8% respectively. Despite the gain in equity markets, our risk appetite index (scale 0 – 100%) remains below 24%. This is the lowest level on the index since August 2009. The CRB index (broad index of global commodity prices) rose 0.7%, although intra-day the index fell to its lowest level since November 2010.

EUR/USD fell to 1.3360 early in the evening, its lowest level since January. However, the currency has almost recouped the losses to be trading around 1.3460 currently. The initial weakness was spurred by dovish comments from the ECB’s Nowothny, noting “rate cuts can’t be excluded” and the “ECB should expand its non-standard measures toolkit”.

The weakness in the EUR quickly reversed after the German IFO for September was stronger-than-expected (expectations component 98 vs. 97.3 expected). Further supporting the EUR was speculation the ECB would consider offering 12-month loans to European banks at its October 6 policy meeting. For now, expect any gains in the EUR to be limited until credible policy actions are announced by European political leaders to stem the crisis.

GBP/USD ground higher overnight, rising from 1.5440 to a high around 1.5570. The GBP was supported by the rising EUR and talk of strong demand from a UK bank related to its quarterly dividend. The gains in the GBP were capped by comments from Bank of England member Broadbent, noting the UK economy would not have to weaken much more to warrant further stimulus. GBP/USD is currently trading at 1.5520.

Risk sensitive currencies took their cues from equity markets and the EUR. AUD/USD fell to 0.9640 at the beginning of the evening, its lowest level since December 2010. AUD/USD bounced to an overnight high of 0.9820, but has fallen to around 0.9750 currently.

Looking to the day ahead, expect markets to remain fixated on the European debt crisis. On the data front, we have some US housing data, consumer confidence and Richmond Federal Manufacturing index.

See our interactive swap rates charts here and bond rate charts here.

Mike Burowes is part of the BNZ research team. 

All its research is available here.