Co-ordinated central bank action to provide US$ liquidty, helped by positive US data, sent risk currencies spiking higher

By Mike Burrrowes

NZD

The NZD exploded higher overnight after the major central banks announced coordinated action to ease USD funding pressures (see Majors section below). The surge in risk appetite catapulted NZD/USD from 0.7650 to 0.7800 in a flash, currently trading around 0.7790.

Yesterday’s residential building consents rose 11.2% in October, following a 17.2% drop in September, which itself followed hefty increases in both July and August. The trend in residential consents is clearly positive, even if coming from a very low base. It contrast, non-residential building consents are still shuffling sideways. Overall, total consents are tracking higher and should see construction activity generate a positive contribution to GDP growth over coming quarters. This is yet another domestic indicator pointing in the right direction that the RBNZ needs to weigh up against the ills of the world.    

The NZD made hefty gains against the GBP and EUR following the central bank action. NZD/GBP surged from 0.4890 to 0.4960 currently. The price action was similar on NZD/EUR, rising from 0.5720 to 0.5800 currently.

NZD/AUD lost ground against a rampant AUD overnight. The cross broke below 0.7600 and briefly fell below 0.7550 as AUD gained more post the central bank action. Over the past couple of hours the cross has recovered to 0.7600. Australian retail sales and building permits could push the cross around on the day.

Looking to the day ahead, we expect today’s Q3 Overseas Trade Indexes to consolidate recent gains, with steady export volumes and terms of trade and implied further gains in core imports This 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 NZD.  Initial support on NZD/USD is eyed at 0.7750 and resistance at 0.7850.

Majors

There was a massive surge in risk appetite overnight after the major central banks announced coordinated action to ease USD funding pressures. This risk sensitive NZD and AUD were the best performing currencies, both surging over 2% higher over the past 24 hours. The “safe haven” USD and JPY were the worst performing currencies.

The surge in risk appetite was broad based. The S&P500 and Euro Stoxx 50 index gained 3.3% and 4.3% respectively. Our risk appetite index (scale 0 – 100%) jumped from 31.3% to 33.6%, but still remains well below its long-run average of 50%. Commodity prices were also boosted by the central bank action, with WTI oil and copper rising 1% and 5.5% respectively.  

The surge in currencies occurred after the central banks of the US, Canada, Japan, the UK and Switzerland announced they would reduce the cost of USD swap lines by 50bps to ease funding pressures (previously OIS + 100bps). The new rates start from 5 December and the next ECB USD auction is on 7 December. Following the central bank action the European 3-month basis swap surged from -162bps to -130bps. This was the most expensive level since the Global Financial Crisis in late 2008. While the reaction overnight was dramatic, this action will not be the panacea to the world’s ills.       

Further highlighting the credit crunch concerns, Chinese authorities cut the reserve ratio requirement for the major commercial banks for the first time in over 3 years (announced prior to the coordinated central banks action but appears to be coordinated). The RRR was lowered by 50bps to 21%, helping to free up cash for lending.

The AUD and NZD surged higher following the central bank actions. AUD/USD relocated from 1.0050 to above 1.0250 in a flash. Expect the intra-day high at 1.0330 to form short-term resistance for the day ahead.
The “safe haven” demand for the USD waned across the board, with the USD index dropping 1% to 78.30.

Further helping the risk-on mood was a better-than-expected ADP employment for November (206k vs. 130k expected) and suggests upside risk to Friday’s non-farm payrolls. Adding to the positive US news, the Chicago PMI for November come in much better than expected (62.6 vs. 58.5 expected). The JPY made very modest gains against the USD, with USD/JPY falling from 77.90 to 77.50 currently.

The EUR/USD also bolted higher following the central bank action, rising from 1.3300 to an overnight high above 1.3500, currently 1.3420. While largely ignored, Italian Prime Minister Monti noted Sarkozy and Merkel will make important announcements about European politics in the coming days. Beyond this, expect the markets focus to shift the EU leaders summit on 9-10 December.

Looking to the night ahead, expect the market’s focus to come back on how political leader plan to stem the Europe debt crisis. Data wise, the initial focus will be on whether the Chinese PMI follows the earlier HSBC PMI below 50. The PMI manufacturing data for November are due in both Europe and the USD.   

Mike Burrowes is part of the BNZ research team. 

All its research is available here.