Euro crisis deepens as fears grow that Greece will not get its next aid payment; Locally market will be waiting for RBA meeting statement

By Mike Burrrowes and Kymberly Martin

NZD

NZD/USD continued to decline overnight as a further escalation in the European debt crisis hit risk sentiment. NZD/USD oscillated around 0.7600 for most of the evening, before sliding to 0.7550 early this morning. This is the lowest level since late-March this year.

The NZD trade-weighted index lost around 0.5% overnight to 67.90. Trading on the NZD crosses continues to be volatile. NZD/EUR rallied from 0.5700 to 0.5740 during the evening before giving these gains up early this morning as risk aversion spiked higher. It was similar price-action on NZD/GBP, reaching an overnight high of 0.4930 before sliding to 0.4880 early this morning.

NZD/AUD continued to recoup the losses suffered following the downgrade to NZ’s sovereign credit rating. The cross is now trading at 0.7890, after falling to a low of 0.7820 Friday afternoon. The key risk for the cross today will be the RBA interest rate decision. With no change in rates expected, the tone of the accompanying statement will be important in setting near-term direction for the cross.  

Looking to the day ahead, locally we have the Quarterly Survey of Business Opinion for Q3. Following this we have the RBA interest rate decision at 4.30pm NZT. Early tomorrow morning we will get the results of the Fonterra dairy auction. We wouldn’t be surprised to see a larger fall in dairy prices than we’ve seen to date. But the lower NZD will help to temper the declines in local currency terms.

For the day ahead, initial support on NZD/USD is eyed at 0.7525 and resistance at 0.7620.

Majors

Risk appetite deteriorated further overnight as the market remains nervous Greece will not receive its next aid payment. In this backdrop, the “safe haven” USD and JPY have outperformed against most of the major currencies. The EUR was the worst performing currency.

Concerns over an imminent Greek default and contagion into the European financial system saw equity markets slide further overnight. The S&P500 index and Euro Stoxx 50 index shed another 2.1% and 1.9% respectively. Our risk appetite index (scale 0 – 100%) slipped to 23.8%, from 24.3%. Copper prices led the declines overnight, shedding 2.4%. Copper is now down 34% from the year’s high.

EUR/USD continued to slide overnight as the Eurozone debt crisis shows no signs of abating. EUR/USD spent most of the evening above 1.3330, but has plummeted to 1.3230 early this morning. The drop in the EUR occurred after the EU’s Junker noted that EU ministers would not make a decision of the Greek aid payment today, as had been widely expected.

Further keeping the EUR on the backfoot was news financial services group Dexia is in trouble. The renewed concerns were sparked after Moody's put the company on review for a possible downgrade. Moody’s noted the bank has large exposure to Greece.

EUR/USD was buoyed early in the evening by better-than-feared Eurozone PMI manufacturing index for August (48.5 vs. 48.4 expected). Encouragingly, the German PMI manufacturing index remained in expansionary territory at 50.3 (vs. 50 expected).

Data outturns in the US were also positive, with the September ISM manufacturing index rising to 51.6 - a full point higher than both the August number and market expectations for this month. More importantly, it did not drop below the 50 threshold and has now been above this level for every month since July 2009. In addition, construction spending for August surprised at 1.4% (vs.    -0.2% expected).

However US equity markets and the USD have taken their cues from the escalating concerns over the European debt crisis. This has seen “safe haven” flows push the USD index up 0.7% to 79.30 overnight.

The GBP failed to get a boost from better-than-expected UK PMI manufacturing for September (51.1 vs. 48.5). GBP/USD briefly popped higher on the data, but has dribbled lower throughout the evening to be trading at 1.5470 currently.

Looking to the day ahead, the focus will remain on the European debt crisis. In this regard, it’s likely we will get some comments from the EU finance minister meeting. Watch for comments from US Fed Chairman Bernanke, who is testifying to the Joint Economic Committee. The data highlights will be UK PMI construction and US factory orders.

Fixed Interest Markets

NZ fixed interest markets were quiet yesterday, closing virtually unchanged. Overnight, US and German bond yields fell.

NZ bonds consolidated yesterday after their sell-off on Friday. The yield on 13s closed unchanged at 2.86%. The yield on 21s closed fractionally lower at 4.42%. The NZ 10-year government bond now trades 32bps above the Australian equivalent. Mid last week the two bonds traded at similar levels around 4.29%, but subsequently NZ yields have risen and AU yields declined.

Swap yields, similarly, had a quiet day. 5-year swaps yields closed unchanged at 3.78%, while 2-year fell 3bps to 3.09%. 2-year yields are consistent with a market that is pricing only one 25bps rate hike from the RBNZ in the coming year. We continue to see this expectation as too low. However, in the near-term, it is possible that the market could revise expectations down even further, if global concerns show no sign of dissipating. NZ continues to stand out as the only major market globally where rate hikes are expected in the coming year.

Overnight, risk aversion was heightened as European debt issues continue to simmer. This saw “safe haven” US and German bond yields decline. US 10-year yields fell from 1.92% to 1.78%, only briefly boosted by a better-than-expected US ISM release (51.5 vs. 50.5 expected). US long bond yields also continue to be driven lower by buying from the Federal Reserve under “operation twist”. US 30-year yields reached their lowest point since early 2009 at 2.78%, overnight.

Today’s NZ Quarterly Survey of Business Opinion will likely confirm the solidity shown in last week’s NBNZ business survey. However, any positive impact will likely be over shadowed by negative off-shore sentiment exerting downward pressure on NZ yields.

The RBA will also announce its target rate today. We expect it to remain on hold at 4.75%, though the market is currently pricing a 25% chance of a 25bps cut. The statement will also be important, as we continue to see the RBA on-hold for the foreseeable future, as opposed to the market that is pricing 140bps of rate cuts in the coming 12 months.

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.