Cold water poured on likelihood of all singing, all dancing Euro debt solution this weekend

By Mike Burrrowes

NZD

NZD/USD pared some of its recent gains overnight as risk sentiment waned. The downbeat mood was spurred by comments from the German Finance Minister, noting a comprehensive solution to the European debt crisis would not be delivered at the EU Summit this weekend. This is in contrast to media reports over the weekend.

NZD/USD slid throughout the evening to around 0.7930, from above 0.8020. While the timing remains uncertain, we think EU leaders are getting much closer to announcing a comprehensive plan that will allay fears of a banking crisis in Europe. We expect such a plan to be supportive for risk sentiment and help spur NZD/USD back to 0.8300 by the end of the year.

The NZD slipped against the EUR and GBP overnight, although the moves were relatively small. NZD/EUR is trading around 0.5770, from above 0.5800. NZD/GBP briefly popped above 0.5100, but has fallen back to 0.5040 currently.

The NZD/AUD cross flat-lined around 0.7780 overnight. Since late-July, this is the first time the cross has spent several days under the 0.7800 level. Given our expectation for stronger NZ growth and higher interest rates (relative to Australia) we expect the cross to move gradually towards 0.8500 by September next year.

Looking to the day ahead, the only highlight will come early tomorrow morning with the bi-monthly Fonterra dairy auction. On the day, NZD/USD support is seen at 0.7890 and resistance at 0.8010.

Majors

Hopes of a bold rescue plan from EU leaders in the coming week to stem the debt crisis, were dashed overnight. As a result, risk sentiment waned and the “safe haven” USD and JPY outperformed all the major currencies.

The fall in risk appetite saw the S&P500 index and Euro Stoxx 50 index drop 2.0% and 1.7% respectively. Our risk appetite index (scale 0 – 100%) eased back to 31.9%, from 35.7% yesterday. Commodity prices fell across the board, with WTI oil prices falling 1.4% to USD86.40 per barrel.

German Finance Minister Schaeuble warned this weekend’s EU summit was unlikely to result in a comprehensive solution to the debt crisis. This is in stark contrast to media reports over the weekend suggesting a plan to significantly expand the EFSF would be ready.

The tempering of hopes for a bold EU bailout package saw EUR/USD plunge from around 1.3900 to an intra-day low around 1.3730. Expect EUR/USD trading to remain volatile as more EU leaders/officials voice their opinion on the bailout package.

The easing in risk appetite has seen “safe haven” demand for the USD. The USD index rallied 0.6% to 77.00 over the past 24 hours. Since the European debt crisis flared-up again at the beginning of September, the USD index is up over 4%, having been up as much as 8% at one stage. The JPY was on the only currency to outperform the USD, with USD/JPY falling from 77.20 to 76.80 currently.

US data outturns and bank earnings gained little attention overnight. US empire manufacturing for October disappointed at -8.5 (vs. -4.0), while industrial production for September was in line with expectations at 0.2%. The start of US Q3 earning season has been mixed. Indeed, Citigroup and Wells Fargo earnings both disappointed the market overnight.

Looking to the day ahead, the tone will initially be set by the release of Chinese GDP for Q3, industrial production and retails sales for September. Beyond this the focus is likely to stay on the Eurozone debt crisis as EU leader/officials try to shape market expectations for the EU Summit over the weekend.

The focus may shift back to the US, with a speech from Federal Reserve Governor Bernanke early tomorrow morning. Markets will be watching for comments about the state of the US economy and Bernanke’s appetite for QE3.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.