Currency markets consolidate as new Italian and Greek PMs get to grips with the task ahead

By Mike Burrrowes

NZD

There was choppy trading in the NZD/USD over the past 24-hours, with the currency returning to trade around 0.7700 this morning. Offshore sentiment consolidated at low levels, as the new Italian and Greek Prime Ministers navigated the first steps in their unenviable roles of bringing their nations back from the brink.

The NZD/USD traded in a range between 0.7630 and 0.7720 overnight, returning to trade at 0.7700 currently. The NZD/GBP showed some volatility overnight, as further negative news hit the GBP (see Majors section). The NZD/GBP currently trades around 0.4880.

The NZD/AUD also chopped around overnight, touching lows below 0.7570 early this morning, before returning to trade at close to 0.7590 currently. Look out for RBA Steven’s speaking at the Financial Services Forum in Sydney today. Comments may push the cross around, particularly if they impact current market pricing for rate cuts in the year ahead (150bps expected from the RBA and 7bps for the RBNZ).

Local data releases today (producer prices) are unlikely to meaningfully impact the currency. The NZD will likely continue to take its cue from offshore risk sentiment, with focus on European developments.

Majors

There has been a bit of consolidation in currency markets over the past 24-hours. The USD index has traded sideways around 78.00.

Our risk appetite index remains fairly steady at 33%. The Euro Stoxx 50 eked out a 0.60% gain, and the S&P500 which fell heavily on the open, has clawed its way back to flat. The broad CRB commodity index was largely flat, although the WTI oil price has grabbed attention, as it has risen above US$100/barrel.

Data outturns on both side of the Atlantic were without drama. Eurozone October CPI was in line with expectation at 0.3% m/m (3.0% y/y). US core inflation was similarly in line with expectation at 2.1% y/y. US inflation is still on a sharp uptrend since the end of last year. However, despite massive monetary stimulus in the US economy the data shows that, for now at least, inflation has not breached target levels. US industrial production data for October was better-than-expected at 0.7% m/m (0.4% expected). The USD index traded in a 77.90 to 78.40 range overnight, returning to 78.00 currently.

More than data, the market continued to focus on European politics. Greek PM Papademos won a confidence vote in parliament. This gives him the mandate to push though austerity measures to secure Greece’s next bailout package, agreed on Oct 26. He stated “Problems will worsen and dealing with them will be harder if Greece does not participate in the euro zone”. Meanwhile in Italy, PM Monti was poised to announce his new cabinet.

In this backdrop, the EUR/USD showed some choppy trading, dipping below 1.3450 overnight, before returning to trade at 1.3520.

Further gloom descended over the UK. The UK labour data showed the unemployment rate picked up to 8.3% in September from 8.1% previously. The Bank of England minutes stated that “the prospects for the UK have worsened.” Based on the current bond buying program, officials projected inflation to fall below 2% on a 2 year horizon (despite still sitting above 5.0%). This suggests further quantitative easing may be implemented. The GBP/USD drifted lower over the past 24-hours from 1.5830 to 1.5780.

The “safe haven” JPY traded in a tight range relative to the USD over the past 24-hours. In recent days however, the currency has retraced about half of the sharp fall in the JPY induced by Bank of Japan intervention. The USD/JPY currently trades at 77.00.

Looking to the night ahead, key data releases will be UK retail sales (more gloom?), Eurozone consumer confidence and US Philadelphia Fed.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.