Markets stabilised overnight, but the Italian situation still remains very uncertain

By Mike Burrrowes

NZD

Despite a modest stabilisation in risk sentiment, NZD/USD was the worst performing currency over the past 24 hours. NZD/USD started the day around 0.7820 but fell to an intra-day low of 0.7730, currently trading around 0.7780. The NZD was the only major currency to lose ground against the USD.

Yesterday’s NZ data releases highlighted the situation in Europe is beginning to be a real drag. It’s a bull in a china shop, albeit not yet out of control. Yes, the NZ economy, and financial system, is in much better shape (than a few years ago) to cope with whatever is thrown at it, as yesterday’s RBNZ Financial Stability Report pointed out.

However, as the FSR also highlighted the headwinds and risks have clearly increased. Meanwhile, we’ve already seen a few signs that the NZ economy may not be picking up quite as forcefully as we expect for 2011 H2. Yesterday’s October’s PMI, for instance, shuddered into negative territory, partly on global worries. In addition, the tax revenue to September proved slower than expected. The next test of our recovery view will come with Monday’s PSI and Q3 retail trade figures.

The NZD trade-weighted index struggled overnight, falling from 68.80 to 68.50. NZD/EUR fell from 0.5730 to 0.5700 currently, while NZD/GBP is unchanged at 0.4890.

The NZD/AUD fell back to 0.7650 overnight, from 0.7690. However, based off NZ-AU interest rate differentials we continue to think the cross is a couple of cents too cheap.

Looking to the day ahead, support on NZD/USD is eyed at 0.7730 and resistance at 0.7820.

Majors

Markets have stabilised overnight, but the situation in Italy still remains very uncertain. The modest recovery in risk sentiment has seen most currencies make small gains against the USD. Despite the improved mood, the AUD and NZD lagged the moves higher.

The stabilisation in sentiment saw the S&P500 index and Euro stoxx 50 index gain 0.9% and 0.2% respectively. The VIX index (proxy for risk aversion) fell from 36.0 to 33.4. The stabilisation feels more like the market is in a holding pattern awaiting further information about Italy.

The barrage of headlines overnight from Europe, on net, helped the EUR recover, but trading remained volatile. EUR/USD is currently above 1.3600, after starting the evening below 1.3500. The urgency in Italian politics to pass the austerity bill and present a unified face to the world helped calm nerves overnight. German Chancellor Merkel helped the mood, noting it is “important that Italy wins back confidence…believes this is happening”. However, Italian industrial production data released overnight for August (-4.8% vs. -3%m/m expected) highlights that the implementation of austerity measures is causing a sharp decline in growth.

After much toing and froing, it was announced that Lucas Papademos will be the leader of the Greek coalition government. This is an encouraging development especially given there will not be an election for several months.  The European Union lowered its GDP forecast to just 0.5% in 2012, which brings it more into line with the OECD's 0.3% forecast of last week

Trading in the other major currencies was very whippy overnight. GDP/USD traded inside a wide 1.5870 to 1.5980 range, ending up around ½ a cent at 1.5950. The Bank of England left rates and its asset purchase program unchanged, as widely expected. The Bank confirmed it will take another 3 months to complete the additional £75b of asset purchases.

Trading in the AUD/USD was even wilder, rallying to above 1.0210 during the evening, before falling to 1.0100 early this morning. It currently trades around 1.0160. Yesterday’s Australian employment data for September was in line with expectations, rising 10.1k. In our view, this data is not sufficient to trigger another rate cut in December from the RBA. This is despite the market pricing 36bps of cuts from the RBA at the next meeting.   

Comments from Bernanke were largely overshadowed overnight. He noted the “Fed should not carry the whole burden to ensure prosperity”. Gaining a little more attention, the US trade deficit was better-than-expected for September (43.1b vs. 46.0b). This is yet another piece of evidence to support our view that growth in the US is stabilising.

Looking to the day ahead, all eyes are likely to remain on the situation in Italy. It’s a relatively quiet end to the data week, with only the US University of Michigan consumer confidence due for release.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.