by Mike Jones
NZD
The NZD continued to stumble southwards overnight. However, the pace of NZD selling eased through the session as the EUR finally picked up the baton of weakest performing currency. The NZD/USD currently trades around 0.7780, about ¾ of a cent below where it started the week.
Greece is still the centre of attention. But instead of rescue efforts, talk amongst European leaders is increasingly shifting towards managing a Greek exit from the EMU. We should get more news on this today as the European finance ministers’ meeting winds up.
Talk of a Greek exit from the Eurozone and mounting worries about Spain (see Majors) crushed European equity markets overnight. Spanish bond yields soared. Our risk appetite index (which has a scale of 0-100%) fell below the 50% long-run average for the first time since January.
Rising risk aversion and deteriorating confidence in the Eurozone saw the EUR/USD slide to 4-month lows, dragging the AUD/USD below parity and the NZD/USD below 0.7800. Both real money and short-term speculative players were noted NZD sellers in the mix.
It’s worth noting, NZ exporters, in aggregate, are positioned for the NZD to keep falling. According to our currency flow monitor, our exporter and fund manager clients continued to reduce hedging duration last week. The exporter hedging index (EHI) for all NZD pairs fell to 3.57 months. The last time hedging was run down to these low levels - in late 2007 and early 2006 - the NZD fell dramatically in subsequent months. Time will tell if exporters have played things as well this time around.
Aside from European headlines, focus for the NZD and AUD today will be the RBA Board minutes (due 1:30pm NZT). Tomorrow morning’s milk price auction will also be important for NZD sentiment to the extent the risks favour further milk price declines.
The RBA minutes will be poured over by investors looking for justification for the surprise 50bps cut. Clearly, this justification will may be useful in gauging the chances of additional easing. The market is already pricing 100bps of additional RBA cuts, so the risks are that they are less dovish than the market expects. This could add some further weight to NZD/AUD in the short-term.
Our short-term NZD/AUD valuation model currently suggests a 0.7800-0.8000 ‘fair-value’ range. So, at around 0.7800, the cross is close to becoming ‘cheap’ on a fundamental valuations basis.
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Majors
Similar themes prevailed overnight. Greece and Spain were in the headlines for all the wrong reasons.
Risk appetite continued to suffer, providing support for the ‘safe-haven’ USD and JPY. In contrast, the EUR/USD slid to 4-month lows below 1.2850.
Chatter about a Greek exit from the Eurozone continued to undermine market sentiment overnight.
Not only did a last ditch attempt to form a Greek government fall over (as expected), but Eurozone officials now seem to be talking more openly about the chances of a Greek exit.
A poor set of Eurozone industrial production figures (-0.3% vs. +0.4% expected) reinforced the downbeat mood.
Spanish worries are also mounting. News Spanish banks borrowed €264b from the ECB in April (from €228b in March) saw 10-year Spanish bond spreads to German bunds widen to all-time highs around 475bps.
Ratings agency Moody’s said Spain’s support for its banking sector was negative for its sovereign rating.
European stocks slumped 2.0-2.7%, the CRB commodity price index declined 1.4%, and the VIX index (a proxy for risk aversion) hit the highest level since February. The fallout on US stocks was a little more subdued; the S&P500 fell 0.6%.
Meanwhile, demand for ‘safe-haven’ European assets saw yields on UK, Swedish, Finnish, German and Dutch 10-year bonds drop to all-time lows.
Despite all this negativity, the impact on currency markets was surprisingly modest. Movements were limited. The USD and JPY continued to find favour, mostly at the expense of the EUR.
‘Risk-sensitive’ currencies like the AUD and NZD struggled to push much lower (although the AUD/USD is now trading below parity), suggesting the antipodeans could be close to reaching ‘oversold’ levels.
Looking ahead, European headlines should continue to dominate market attention. This is particularly so given we will start to receive headlines from this morning’s Ecofin/Eurogroup meetings shortly. There is also first quarter Eurozone GDP figures (-0.2%q/q expected) and the German ZEW survey to watch for tonight. Neither will be particularly inspiring. Tonight’s US retail sales for April should print a small positive.
Overall, we suspect the market’s bias is still to sell the EUR/USD and risk currencies on rallies. The next key level of support on the EUR/USD is eyed around 1.2670. Short-term resistance will be encountered on any bounces towards 1.2900.
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