Knee jerk reaction to pulling of Greek referendum helps risk markets higher

By Mike Burrrowes

NZD

The NZD gained around 0.5% relative to a broadly weaker USD over the past 24-hours. The NZD/USD traded from lows yesterday afternoon around 0.7810 to 0.7950 currently.

Yesterday’s NZ labour market headlines were slightly disappointing. The Q3 unemployment rate edged up to 6.6% (6.4% expected) from 6.5% previously. This will serve as another factor to give the RBNZ room to pause before hiking rates. However the job trends were upbeat and hours worked solid. In fact, the NZ employment rate sits amongst the highest in the OECD, reflecting robust participation rates.

However, the NZD responded to the headline rise in the unemployment rate, gapping lower early yesterday morning. The NZD/USD then drifted lower over the course of the day, before trading higher overnight, with some volatility, as global market sentiment improved (see Majors section). It currently trades around 0.7950.

Trading in the NZD/EUR was volatile overnight whipped around by the unexpected ECB rate cut and news flow regarding Greek developments. The NZD/EUR currently trades around 0.5750, at similar levels to yesterday morning.

The NZD/AUD plunged sharply yesterday morning on the release of the NZ employment report. From lows around 0.7610 yesterday afternoon, it then climbed to a high last evening above 0.7670, before easing off to 0.7630 currently.

There are no NZ data releases today. Expect the NZD to be directed by global risk appetite, and especially any new headlines regarding the ongoing Greek debacle.

Majors

Market sentiment improved over the past 24-hours as the ECB unexpectedly cut interest rates by 25bps and Greece stepped back from plans for a referendum on their bail-out deal. European currencies were broadly stronger against a weak USD. The “safe haven” JPY was the weakest performer, though still holding its own relative to the USD.

Markets were buoyed overnight, after the ECB, under new leadership, surprised the market with a rate cut. Although the move confirms the probability of EU recession, it suggests the ECB will be willing to act proactively. Market sentiment was also improved by reports that Greek PM Papandreou has stepped back from plans for a national referendum. This came after an emergency high pressure meeting with France’s Sarkozy and Germany’s Merkel. Papandreou has acquired some concessions from the opposition, saying “if we have consensus, then we don’t need a referendum”.

Market breathed a small sigh of relief with the Euro Stoxx 50 up 2.45%, the S&P500 currently up 1.60%. The VIX index (a proxy for risk aversion) fell from an overnight high of 34.5 to 31.0. The EUR/USD showed some volatile trading overnight, initially falling after the ECB rate decision, but soon recovered to trade around 1.3850 currently.

The USD showed similar choppy trading. Aside from developments in Europe, the USD was tossed about by US data releases. Early this morning, US productivity and ULC data surprised positively (the latter -2.4% vs. -1.0% expected). Later, followed slightly disappointing consumer confidence numbers (-53.2 vs. -50.0). The USD index declined almost 1% overnight to 76.70 currently.

The “commodity-linked” currencies, CAD, AUD and NZD made modest gains relative to the USD overnight, as risk appetite improved and broad commodity prices rose. With some volatility, the AUD/USD traded up from around 1.0200 last evening, to just above 1.0400 this morning.

The USD/JPY trickled a little lower overnight. However, it remains well above the 75.30 level it touched before Bank of Japan intervention on Monday. Global risk appetite will be the greatest help or hindrance to BoJ efforts to weaken its currency. If risk appetite stabilises then demand for the “safe haven” JPY will diminish, irrespective of BoJ efforts.

Tonight, we get the RBA Monetary Policy Statement. This evening we get German factory orders, and the closely watched US non-farm payrolls data.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.