EUR absorbs the news that S&P had put 15 Euro soverigns on credit watch negative; RBA cuts official cash rate

By Mike Burrrowes

NZD

The NZD has been fairly range-bound against a backdrop of relatively quiet markets over the past 24-hours. The NZD/USD is back at similar levels to yesterday morning, currently trading just under 0.7800.

After the initial knee-jerk response to yesterday’s announcement by rating agency S&P that it was placing several European sovereigns on negative watch, markets quickly stabilised. Overnight, equity markets fluctuated in a relatively tight band, with the Euro Stoxx 50 closing down 0.5% and the S&P500 currently flat.

In the early hours of this morning, the most recent Fonterra milk auction showed average prices rose 2.6%. This concurs with our view that prices likely peaked early this year but are now stabilising.

Late yesterday afternoon, the RBA delivered a 25bps rate cut. This had largely already been priced by the market. However, initially the NZD/AUD spiked from 0.7600 to 0.7630 on the announcement. Subsequently, the cross quickly lost upward momentum, drifting overnight, to trade around 0.7620 this morning.

Trading in the NZD/EUR was range-bound between 0.5800 and 0.5820 overnight, currently trading at the top end of this range. The NZD/GBP poked its nose above 0.5000 early this morning, as it did early in the week. Previously, it had not been at this level since the end of October.

NZ wholesale trade data will be released today which we expect to imply a 1.2% gain in activity. All attention however will be on tomorrow’s RBNZ meeting. We expect the RBNZ to remain on hold, push out its implied rate hiking cycle, but maintain a medium-term tightening bias.

Majors

Markets were uncharacteristically quiet overnight. Most currencies have been fairly range-bound over the past 24-hours. The USD index is trading at similar levels to yesterday morning, just under 78.60.

After yesterday morning’s announcement by rating agency S&P that it had placed 15 European sovereigns on negative watch, the EUR/USD traded lower to 1.3340. While hardly unexpected, the announcement initially jolted the market. The viability of a number of European initiatives, such as the EFSF, is dependent on solid credit ratings for core European countries. However, the EUR very quickly stabilised as did other markets. The EUR/USD has subsequently traded in a tight range around 1.3400.

The German Finance minister stated that the downgrade warning may force European leaders to ratchet up efforts to resolve the crisis at their Dec 8-9 summit. Stating the obvious he said “the truth is that markets in the whole world right now don’t trust the euro area at all”.

In the absence of any key data releases yesterday on either side of the Atlantic, the GBP/USD drifted a little lower, to trade around 1.5580 this morning.

Yesterday’s 25bps cut from the RBA had little lasting impact on the AUD, as the market had largely discounted it ahead of the meeting. Immediately after the announcement the AUD/USD gapped from 1.0240 to below 1.0200, but soon returned to trade at 1.0240. The AU Q3 GDP release will be key for the currency today. Consensus expectations are for a 0.8% q/q rise, following a 1.2% rise in the previous quarter.

In Europe this evening, UK and German industrial production data is released, along with US consumer credit data.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.