Lower liquidity and Euro rumours make for a choppy market

By Mike Jones

NZD

The NZD continues to dance to the beat of global risk appetite. The NZD/USD spent last night trading choppily within a 0.7650-0.7770 range as risk sentiment ebbed and flowed.

The NZD/USD spent the first part of the night on the front foot after a larger than expected take-up of ECB funds (see “Majors” for details) buoyed risk appetite. Stock markets pushed higher, the VIX index (a proxy for risk aversion) fell below 22 (from above 23), and the risk sensitive NZD/USD was propelled to a 2-week high around 0.7770.

Predictably though, the positive sentiment didn’t last long. Rumours of an imminent French downgrade and a steady widening in Italian sovereign bond spreads combined to scuttle the risk rally. The NZD/USD was knocked back towards 0.7700 accordingly.

The NZD took yesterday’s dour NZ current account balance figures more or less in its stride. Yet, the expansion in the annual deficit, to 4.3% of GDP in Q3 (against the 3.9% expected by us and the market), suggested to us the deficit is now clearly trending wider. At a time of heightened global focus on indebtedness and imbalances, this trend widening is expected to limit the extent of NZD/USD appreciation we expect in 2012.

The heavy NZ data week continues this morning with third quarter GDP figures (released 10:45am). We’re looking for a 0.7%q/q expansion. Such a result, while hardly spectacular, would help bolster confidence in the NZ economy’s stuttering recovery. Still, we’d probably need to see something stronger than 0.8% for the NZD/USD to sustain an upside break of the familiar 0.7500-0.7850 range.

Majors

After a choppy night, the USD opens this morning stronger relative to most of the major currencies. Having plumbed an overnight low of around 79.30, the USD index now sits around the 80.00 mark.

Earlier in the night, hopes the ECB’s liquidity programme would ease European financial stresses bolstered risk appetite, weighing on the “safe-haven” USD. The ECB allotted €489b of funds to 523 banks in its first 3-year refinancing operation, well above market expectations of €250b to €350b.

European equity markets and the EUR initially leapt in response. The DAX and CAC 40 both jumped around 1%, while the EUR/USD rose from 1.3150 to a one week high of nearly 1.3200, dragging most of the major currencies higher in its wake.

Gains in the GBP were particularly noteworthy. There was little reaction to the November Bank of England MPC minutes showing a unanimous decision to keep asset purchases at £275b. However, November’s UK public borrowing figures made for surprisingly pleasant reading (£15.2b vs. £16.6b expected). As a result, it looks as if the UK government will now easily undershoot the higher borrowing target announced in the autumn statement. After starting the night around 1.5680, the GBP/USD hit an overnight high of almost 1.5770.

Later in the night, the good cheer began to evaporate. Not only did rumours of a French sovereign downgrade dent sentiment, but traders began to doubt the likely effectiveness of the ECB’s massive liquidity injection.
Investors’ risk appetite faltered, stock markets went into reverse (European equity markets closed down 0.6-1.0%) and “safe-haven” demand for the USD knocked most of the major currencies lower again. The EUR/USD tumbled from above 1.3150 to around 1.3050 and the GBP/USD slipped back below 1.5700. An encouraging set of US existing home sales figures (4.0%m/m vs. 2.2% expected) may have also helped bolster USD sentiment.

Looking ahead, don’t be surprised to see more choppy and rangy price action through the Christmas and New Year period as volumes continue to thin out. Skittish risk appetite should continue to provide support for the USD on dips. Near-term support on the USD index is eyed towards 78.60 with resistance at 80.70.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.