By Mike Burrrowes
NZD
The NZD was at the mercy of developments offshore overnight. An escalation in the European debt crisis (see Majors below) saw a broad-based rout across all asset classes. Over the past 24 hours, NZD/USD has shed almost 1 ½ cents to 0.7850 currently.
The NZD trade-weighted index has underperformed, falling from around 69.60 to 69.10 currently. It was NZD/JPY that led the declines overnight, falling 1.6% to around 61.00 currently. The NZD trickled lower against the GBP, currently trading around 0.4920. The NZD made a modest gain against the EUR to be trading above 0.5770 currently.
The spike in risk aversion saw the AUD/USD get hit harder, meaning NZD/AUD steadily rose from 0.7760 to 0.7700. There is plenty of event risk for the cross today. In NZ, we have the RBNZ Financial Stability Report; the governments September fiscal account; BNZ PMI survey; and ANZ consumer confidence. Across the ditch, AU employment data is due for release.
Looking to the day ahead, support on NZD/USD is eyed at 0.7800 and resistance at 0.7900.
Majors
Risk aversion surged in markets overnight as investors worry Italy will not be able to pass necessary austerity measures. In this backdrop, there was strong “safe haven” demand for the USD and JPY. European currencies and the risk sensitive NZD and AUD led the declines.
The rout has been broad based across markets. The S&P500 index and Euro Stoxx 50 index both fell 2.3%. The Italian stock index, the FTSE MIB, plunged 3.8% overnight and is down 25% for the year. Our risk appetite (scale 0 – 100%) collapsed from 37.7% to 33.2%.
The epicentre of the European debt crisis is now Italy, no longer Greece. The fresh concern over the precarious state of the Italian economy was spurred by news the clearing house, LCH Clearnet, has raised its margin requirement on Italian bonds. This triggered a surge in 10-year Italian bond yields, rising above 7%. Italy cannot afford to fund at this rate, meaning it either needs to implement harsher austerity measures or get aid from the IMF. EUR/USD plunged from 1.3830 to an intra-day low of 1.3550, currently 1.3590.
Expect developments in Italy and Greece to weigh on sentiment until more clarity is provided on the structure of their governments. In Italy it remains unclear how a new government will be formed once Prime Minister Berlusconi leaves. Berlusconi's last act will come tomorrow night when he tries to pass the important austerity bill (€45.5b). Meanwhile, in Greece there is no conformation of who the leader of the coalition government will be. The latest speculation is the former ECB Vice President, Papademos, is out and the new front runner is Filippos Petsalnikos (former Minister of Justice and Public Order).
The spike in risk aversion has seen strong “safe haven” demand for the USD and JPY. In times of market stress investors flock to the safety of US government bond markets, while Japanese investors repatriate offshore investments. The USD index gained 1.4% to 77.70. The JPY kept pace with the USD over the past 24 hours, currently around 77.70. In this backdrop, the risk sensitive AUD and NZD were among the worst performing currencies. AUD/USD shed almost 2 cents over the past 24 hours to be trading just under 1.0200. The market’s attention may be briefly diverted from the situation in Europe this afternoon when AU employment data is released. Our NAB colleagues and the market expect a 10k increases in employment, but note the series is very volatile.
The GBP was pressured lower by concerns over Europe and further signs the UK economy is struggling. The UK trade deficit for September was much weaker-than-expected (£3,940m vs. £2,100m expected). GBP/USD fell from 1.6100 to around 1.5960 currently. Tonight, we don’t expect any change from the Bank of England to either rates or its asset purchase program.
Looking to the day ahead, all eyes are likely to remain on the situation in Italy. Will the fiscal austerity be enough to appease the market, or, do they need some help from the IMF? On the data front, we have German CPI; French industrial production; EU growth forecasts; BoE interest rate decisions; and the US trade balance. The Fed’s Evans and Liang are due to speak early tomorrow morning.
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Mike Burrowes is part of the BNZ research team.
1 Comments
I think the Euro zone crisis will only get worse. Every one of these countries have cheated to get accepted into the Union. How can you have a stable union when everyone is lying about the true condition of their finances. It is ridiculous. There is so much debt is is absolutely unsustanable.The euro currency in the current format is doomed unfortunately.
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