NZ$/US$ traded within a 0.7370 to 0.7440 range; Belgium cedit rating downgrded

(Updated - The New Zealand dollar firmed a cent to around 74.9 USc in morning trade on Monday after National won a second term in office with a tight but manageable majority.)

By Mike Burrrowes

NZD

The NZD took its cue from negative developments in the European debt crisis. This time the focus was on a poor Italian bond auction and downgrade to Belgium’s credit rating. NZD/USD traded within a 0.7370 to 0.7440 range, closing below 0.7400.

The NZ election saw National win a clear mandate to govern. It was the worst showing for Labour in decades with the Greens and NZ First the big winners. National will form the Government with necessary support from ACT (1 seat) and United future (1 seat). The result should see no big changes in Government policy.

Trading in the NZD crosses were very subdued on Friday. NZD/EUR spent the evening treading water around 0.5580. NZD/GBP was slightly more volatile, falling to an intra-day low around 0.4770, currently trading around 0.4780. The NZD/AUD steadily dribbled lower from 0.7640 to just above 0.7600 currently.

Looking to the week ahead, today we have the NBNZ business survey. If the survey drops with a thump – with global events an obvious excuse – then our robust GDP growth story might come under question. Tuesday’s National Employment Indicator for September, will help us judge jobs momentum. Wednesday morning serves up October’s building consents, which we think will look okay, following what seemed a largely technical correction in September. Wednesday afternoon’s credit aggregates will surely be another mixed and generally tepid bunch. We expect Thursday’s Q3 Overseas trade indexes to consolidate recent gains. Thursday afternoon’s ANZ commodity export prices for November are prone to a bit more softening, in world price terms, but nothing alarming and greatly cushioned by the lower NZ dollar in any case.   

Majors

All of the major currencies ended lower against the USD on Friday. Again the declines were lead by concerns over rising European sovereign bond yields.

The moves across other asset markets were mixed. The Euro Stoxx 50 index gained 1%, while the S&P500 lost 0.2%. The divergence in equity markets was driven by the S&P500 index playing catch-up after being close on Thursday evening. The VIX index (proxy for risk aversion) rose from 34.0 to 34.5. The CRB index (broad index of global commodity prices) declined almost 0.5%.

The EUR/USD fell to an intra-day low around 1.3210 during Friday evening, its lowest level since the beginning of October. The declines were spurred by a poor Italian bond auction. Italy paid a record 6.5% to borrow for six months and their 10-year bonds rose 17bps to 7.23%. Adding to the negative sentiment was news ratings agency S&P had downgraded Belgium one notch to AA and remains on watch negative.

There have been several media reports over the weekend suggesting Germany and France are coming up with a new plan to stem the crisis. The Wall Street Journal noted the leaders are debating a plan to accelerate fiscal integration of the Eurozone. The suggestion is that bilateral agreements between member nations would speed up the process and not be as cumbersome as changes to EU treaties. EU authorities would gain the power to enforce fiscal discipline in the 17 nation Eurozone.  The unsourced story was also carried by the German press, which wrote of a January dateline for agreement on the new rules.

The GBP was dragged lower by the moves in the EUR. GBP/USD declined early Saturday morning from above 1.5500 to 1.5450. The Wall Street Journal reported that the UK Treasury may step in to guarantee bank lending to SME businesses in a bid to reduce costs of borrowing and stimulate lending to a vital part of the economy that is struggling for fresh funding. The Telegraph notes the OECD is predicting the UK economy falling back into recession in the first six months of next year.

Looking to the week ahead, expect the market to focus on the proposed EU plan to fast track fiscal consolidation within the Eurozone. There is also some speculation that this move may allow the ECB to expand its purchases of sovereign bonds in the secondary market. In the US, the highlights will be the ISM manufacturing on Thursday, non-farm payrolls on Friday and several Fed speakers throughout the week. PMI manufacturing releases for the UK, EU and China will be closely watched for any further signs of weakness.

Mike Burrowes is part of the BNZ research team. 

(Updated by Interest.co.nz after morning move)

All its research is available here.