NZ TWI above 70 driven by Euro rescue hopes but falls relative to A$

By Mike Burrrowes

NZD

The NZD has surged higher since the beginning of the week, led by hopes the EU will announce a rescue plan on Wednesday (see below). NZD/USD has surged almost 2 cents higher this week to 0.8090 currently. The second EU Summit on Wednesday will be key for near-term direction in FX markets.  

The NZD trade-weighted index has surged from 69.40 at the beginning of the week to 70.10 currently. NZD/EUR made slow progress over the past couple of days to above 0.5800 currently. It was similar in NZD/GBP, rising from 0.5030 to 0.5060 currently.

The NZD failed to keep pace with the rising AUD, falling from 0.7750 to 0.7710 currently. The move lower in the cross continues to be driven by NZ-AU interest rate differentials moving in the AUD’s favour. The NZ-AU 3-year interest rate differential is now -115bps, from -106bps at the end of the last week. The Australian CPI on Wednesday will be important for the cross.

Looking to the week ahead, expect the NZD to take its cues from developments in the European rescue plan. Local data outturns should briefly grab the markets attention, with CPI for Q3 due today, NBBO on Wednesday and the RBNZ interest rate decision on Thursday. Today, NZD/USD support is seen at 0.8020 and resistance at 0.8150.

Majors

Risk sentiment has continued to improve as EU leaders are almost ready to announce a rescue package. The risk sensitive NZD, AUD and CAD have outperformed against the USD. The second EU summit on Wednesday will be pivotal for setting near-term direction in markets.

The improvement in risk sentiment has been broad based. In equity markets, the S&P500 index and Euro Stoxx 50 index both gained 1.3% overnight. Our risk appetite index (scale 0 – 100%) has recovered to 34.4%, from 32.5%.

The EUR has marched higher over the past couple of trading sessions as investors become more optimistic an EU rescue package is almost ready. Since Friday, EUR/USD has surged from below 1.3800 to just below 1.3950 currently.      

At the EU Summit over the weekend, leaders appeared to make good progress on the rescue plan. Leaders have agreed to recapitalise the banks (€109bn) in the next 6-9 months. On the increase in the EFSF, there is agreement that the ECB will not be used to lever it up, but no real agreement on how to achieve the €1tn thought to be required.

On the Greek debt haircuts, a 50% cut is now expected (some propose less, others more), but there is still no clarity on who takes the writedowns. Expect the final details of the plan to be announced at the second EU Summit on Wednesday.

GBP/USD has been lifted by the improvement in sentiment over the past 24 hours, rising from 1.5920 to 1.6000 currently. The gains in the GBP were tempered by comments from Bank of England member Weale, noting he would not be “surprised if UK GDP fell in Q4”. A testimony by BOE Governor King on Tuesday night will be closely watched.

Despite the improvement in sentiment, the JPY has strengthened to around 76.00 against the USD. The ongoing strength in the JPY saw the Japanese Finance minister warn of further intervention to stem the rise in the currency. Little is expected from the Bank of Japan meeting on Thursday.

The AUD has benefited from the improvement in global risk sentiment sentiment and data showing the Chinese economy is ticking along. The HSBC Chinese PMI manufacturing recovered to 51.1 in October, after falling to 49.9 in September. AUD/USD is currently trading around 1.0480, from 1.0320 at the beginning of the week.  

This week the focus is likely to remain on the ongoing European sovereign saga. This is likely to keep markets volatile and participation low. We are likely to see further headlines into Wednesday’s negotiations. There is, however, some data released this week that should be important for the perception of global economic growth.

Data wise, we have US durable goods on Wednesday, Eurozone consumer confidence and US GDP for Q3 on Thursday and University of Michigan consumer confidence on Friday. These are likely to be less market moving. 

Mike Burrowes is part of the BNZ research team. 

All its research is available here.