Sentiment towards the EUR brightened noticeably

By Mike Jones

NZD

From hero to zero. The NZD has been the weakest performing currency over the past 24 hours thanks to some modest declines in commodity prices and aggressive NZD/EUR selling. The NZD/USD dropped to a low of around 0.7910, before recovering slightly.

According to the ANZ index, world prices for NZ commodities eased 0.8% in December, in line with our expectations. NZ dollar commodity prices fell 0.6%. We expect world prices for NZ commodity prices to continue to drift lower this year, representing a modest handbrake on further NZD gains.

Although volatile, global commodity prices mostly eased last night as well. The CRB index (a broad index of global commodity prices) slipped 0.4% after some less than inspiring economic data called into question the strength of the global economy. November figures showed UK and EU industrial production going backwards and US retail sales also undershot market expectations.

But it was an aggressive bout of NZD/EUR selling that provided the real drag for the NZD overnight. Sentiment towards the EUR brightened noticeably. Not only did the ECB talk up signs of “stabilisation” in the Eurozone, but successful Spanish and Italian bond auctions cooled debt fears. A rapid unwinding of speculative “short” positions in the EUR/USD and EUR crosses saw the EUR/USD jump over 1 cent to 1.2820 and NZD/EUR slide from above 0.6260 to almost 0.6180.

Looking ahead, NZD/EUR still looks overbought and further position unwinding may drag the currency lower in the short-term. However, NZ’s more positive fundamentals means the big picture remains one of a cyclical uptrend. As noted previously, the ‘peak’ in NZD/EUR could be as high as 0.6500-0.6600.

For today, keep an eye out for REINZ housing market data which may be released at some stage. Near-term resistance on the NZD/USD is sighted on bounces towards 0.7980. Support is at 0.7870.

Majors

It’s been a night of mixed fortunes for risk appetite and the major currencies. The most eye-catching development has been a sharp rally in the EUR, which has seen the USD finish the night weaker relative to most of the majors.

The EUR and GBP traded with a softer bias through the early part of the night. Industrial production data for the UK and EU undershot analysts’ already pessimistic expectations, suggesting Q4 GDP growth for the region is likely to print negative.

However, later in the night, wildly successful European bond auctions lit a rocket under the EUR and bolstered investors’ appetite for risk.  Spain sold €10b worth of debt, double that expected, and at relatively attractive yields (below 4%). This represents around 12% of Spain’s total funding requirement for 2012, so it’s not surprised investors were encouraged by the news. The Italian debt auctions were for shorter maturities but just as successful. A total of €EUR12b was raised at yields well below the rates seen late last year and early in 2012.

Easing fears about the state of European bond markets saw the EUR/USD soar from 1.2720 to almost 1.2840. The extent of this move was likely exacerbated by previously extreme “short” positioning. European equity markets were also heartened by the news and peripheral sovereign credit spreads narrowed appreciably. Indicative of such, the 10-year Spanish/German government bond spread fell 20bps to 330bps.

Despite the EUR blazing a trail higher, most of the major currencies were unable to benefit from the weaker USD. Broad-based buying of EUR crosses (EUR/JPY, EUR/GBP, and EUR/AUD) looks to have been the reason.

Policy meetings from the Bank of England and ECB had relatively little bearing on currencies. As expected, the BoE voted to keep rates unchanged at 0.5% and to maintain its asset purchase programme at £275 billion.

‘Keep calm and carry on’ was the message from last night’s ECB policy meeting. President Draghi kept the ECB’s official rate unchanged at 1.0%, pointing to “tentative signs of a stabilisation in activity at low levels”. We expect rates to remain on hold at 1% for an extended period of time, but the ECB could find scope for a further small rate cut if conditions deteriorate markedly.

Risk appetite and equity markets gave up some ground late in the overnight session following surprisingly weak US retail sales figures (0.1%m/m vs. 0.3% expected). USD sentiment also suffered. USD/JPY slipped from above 76.90 to around 76.70 and EUR/USD continued to climb.

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