Offshore markets quiet on German approval of expanded EFSF; NZ$ down on credit rating cut

By Mike Burrrowes

NZD

The NZD was the worst performing currency over the past 24 hours, falling almost 1 cent to 0.7670 currently. The weakness was driven by a surprise downgrade to NZ’s credit rating by Fitch. Poor risk sentiment added to the declines in the NZD.

Ratings agency Fitch downgraded NZ one-notch to “AA” with a stable outlook overnight (versus Moody’s AAA and S&P’s AA+). In the ratings actions, Fitch cites our high level of external debt as an outlier amongst our rated peers – though our creditworthiness is supported by moderate public indebtedness, fiscal prudence and strong public institutions.

NZD/AUD has really struggled overnight. Over the course of the evening, the cross fell from 0.7940 to 0.7910. News of a downgrade to NZ’s credit rating saw the cross collapse to 0.7870. In the very near-term, we still see some further downside risks to the cross. Indeed, the last time the NZ-AU 3-year interest was above -100bps, the cross was trading at 0.7800. In the near-term, the risks are skewed to a further fall on NZD/AUD. But we still believe rising NZ interest rates and stronger domestic growth will see the cross trading beyond 0.8500 by September next year.

The NZD has lost ground against the EUR and GBP overnight. NZD/EUR fell sharply early this morning to 0.5600, from 0.5720. The price action was similar on NZD/GBP, falling from 0.4990 to 0.4920 currently.  

Looking to the day ahead, the only local data due for release is NZ building permits. This is second tier data, so expect the NZD to take its cues from sentiment offshore. Initial support on NZD/USD is eyed at 0.7650 and resistance at 0.7750.

Majors

It was a relatively subdued night in FX markets, with the USD index broadly unchanged at 78.00. For now, markets seem to be in a holding pattern awaiting further developments in the Eurozone debt crisis.

The good news from Europe and better US data saw the S&P500 equity market open up over 2%, but these gains have been given up in the past couple of hours. The Euro Stoxx 50 index gained 1.6%. While sentiment has stabilised in recent days, markets still remain extremely nervous. Indeed, our risk appetite index (scale 0 – 100%) remains near its lowest since August 2009, at 25.6%.

EUR/USD reached an overnight high around 1.3680 during the evening, although these gains have been reversed this morning to be trading at 1.3560. EUR/USD was initially buoyed by news the German Parliament had ratified the expansion of the EFSF.  This may pave the way for European political leaders to begin more openly discussing further options to stem the debt crisis.

EUR/USD gave back its gains in the early hours of this morning after some better-than-expected US data. The highlights were GDP for Q2 coming in at 1.3%qoq (vs. 1.2%qoq expected) and weekly jobless claims falling to a 5-month low of 391k (vs. 420k expected).

Comments from several European leaders/officials did little to help the EUR early this morning. Greek Prime Minister Papandreou hardly instilled confidence that Greece will receive the next aid payment, noting a meeting with the Troika was a “positive, creative environment”. Following this, a Eurozone official noted the EFSF will be modified so that further ratification by each parliament is not required. In addition, the expanded fund could not trigger a credit rating downgrade for any of its member countries. This suggests the expanded fund may fall short of market expectations.

The GBP has again taken its cues from the EUR. GBP/USD briefly popped above 1.5700, but has shed almost 1 cent early this morning as US equities reversed their initial gains. The market is now looking to the Bank of England monetary policy committee meeting next week. The majority of economists in a Reuters poll forecast the Bank will resume quantitative easing in November, but saw a 40% chance it could start in October.

Looking to the day ahead, expect the trials and tribulations of the European debt crisis to keep trading in FX markets volatile. On the data front, we have Eurozone CPI and employment data, US personal income and the University of Michigan consumer confidence. The Fed’s Bollard is also due to speak.   

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.