Markets subdued after yesterday's central bank induced excitement; Spanish and French bond auctions saw solid demand

By Mike Burrrowes

NZD

The NZD/USD spent the evening oscillating within a 0.7720 to 0.7800 range, currently 0.7770. Overall, NZD/USD is marginally lower as global equity markets have lost some ground after the large gains on Wednesday night.   

While not gaining much attention, late in the London morning ratings agency S&P downgraded the Australian and NZ banks 1 notch with stable outlooks. A one-notch downgrade was considered the best outcome under the new methodology being applied to all banks globally.

The NZD/AUD cross has stabilised above 0.7600, helped by yesterday’s softer Australian retail sales for October (0.2% vs. 0.4%m/m expected). The cross will likely get knocked around next week, with the RBA interest rate decision on Tuesday. The market is more than fully priced for a 25bp rate cut from the RBA while we expect no change. On Thursday, the RBNZ delivers its Monetary Policy Statement. We expect the RBNZ to lower its 90-day bank bill track, but still maintain its tightening bias.

Looking to the day ahead, expect the NZD to take its cues from development offshore. Initial support on NZD/USD is eyed at 0.7720 and resistance at 0.7850.

Majors

It was a more subdued night in FX markets, with most of the major currencies consolidating against the USD. The EUR made modest gains, while the NZD and AUD were the weakest performing currencies.  

The S&P500 index and Euro Stoxx 50 index fell 0.2% and 0.7% respectively, a very modest pullback after yesterday’s large rally. The VIX index (scale 0 – 100%) is slightly higher at 27.7. The CRB index (broad index of global commodity prices) fell 0.6%.

The EUR/USD made modest gains to be trading around 1.3470 currently. Sentiment towards the EUR was bolstered by solid investor demand for Spanish and French debt at their bond auctions. While the issuance put upward pressure on interest rates, markets were encouraged by the solid bid-to-cover ratios. It’s a sign of the times when just getting debt away is seen as positive.    

Comments from ECB President Draghi weighed on the EUR. He noted that the downside risks to Europe have increased and hinted the Bank only has a limited toolkit to stem the crisis. Indeed, he also noted deeper fiscal integration was a necessary step to stem the crisis.

Next week is shaping up to be important for the EUR. On Thursday the ECB is widely expected to cut interest rates to 1% and make some comments about purchases of European sovereign bonds. On 9-10 December EU leaders meet to discuss their plans for faster fiscal integration and expansion of the EFSF. EU Leaders will need to deliver concrete action at this meeting to prevent a further rout in European sovereign debt markets.  

The USD index spent the evening treading water around 78.30. US data outturns continue to beat expectations, suggesting the US economy is stabilising at well above recessionary levels. Overnight, both the ISM for November (52.7 vs. 51.8 expected) and construction spending for October beat expectations (0.8% vs. 0.3%m/m expected).

The “safe haven” CHF struggled despite the mild risk-off tone, with EUR/CHF rising from 1.2270 to 1.2330 currently. The weakness in the CHF occurred after a Swiss government official noted the Swiss National Bank was considering negative interest rates and/or lifting the peg to 1.2500.

Looking to the night ahead, expect the market’s focus to turn to next week’s ECB meeting and EU leaders’ summit on 9-10 December. Data wise, the focus will be on US non-farm payrolls and UK PMI construction.    

Mike Burrowes is part of the BNZ research team. 

All its research is available here.