by Mike Jones
NZD
The NZD continues to suffer from a toxic mix of global risk aversion and weakening domestic fundamentals. Early this morning the NZD/USD skidded to fresh lows for the year below 0.7700.
Yesterday’s NZ GDP revisions certainly did the NZD no favours. The downward revisions to 2011 annual growth (to 1.1% from 1.4%) kicked off a bout of NZD/AUD selling that continued through the offshore session.
Another fall in milk prices overnight added to the negative NZD/AUD momentum. Prices fell 6.4%, to be down 24% over the year to date, or 41% below the 2011 peak.
In part, the fall reflects a firmer USD relative to the last auction. Nonetheless, today’s result only adds to the evidence suggesting next season’s Fonterra dairy payout will be considerably lower than the season just ending.
From around 0.7810 this time yesterday, the NZD/AUD now trades closer to 0.7740. Short-term ‘fair-value’, as estimated by our valuation model, remains in the 0.7800-0.8000 range, suggesting the cross is now ‘cheap’ relative to NZ-AU fundamentals.
Not only did steady NZD/AUD selling weigh on the NZD/USD overnight, but risk appetite deteriorated further, as fears of a Greek EU exit went into overdrive. Our index of risk appetite (scale of 0-100%) has fallen close to lows for the year around 45%. Alongside a steady decline in the EUR/USD, a further trimming of risk positions saw the NZD/USD dragged below 0.7700 the first time since December.
It’s not just the NZD that has been in decline. Local interest rates plunged yesterday. Swap yields eased 5-10 bps across the curve. This appeared to reflect not only some large receiving flows around the long-end of the curve, but also noticeably less corporate hedging (paying) activity. The NZ 2-year swap yield sits around 2.51%, just 5bps above last week’s all-time low. Implied RBNZ expectations amount to 27bps of easing over the coming 12 months.
For today, the combination of sliding local interest rates and generalised global risk aversion should keep the NZD/USD heavy. Bounces above 0.7700 will likely be met with selling interest. Exporter buying may limit the downside initially.
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Majors
Once again, last night’s currency movements were all about risk aversion. The official collapse of Greek attempts to form a government saw investors dive for cover, bolstering sentiment towards the ‘safe-haven’ USD.
Early in the night, encouraging economic data underpinned a modest stabilisation in risk assets. Surprisingly enough, the Eurozone economy managed to escape a return to technical recession. Q1 GDP printed flat, above analyst expectations of -0.2%q/q. US data was also pretty reasonable. A small (0.1%) gain was recorded for April retail sales, and the May Empire manufacturing survey bounced back strongly from April’s weakness (17.1 vs. 9.0 expected). Global equity markets squeezed higher and ‘risk-sensitive’ currencies and the EUR/USD bounced off their lows.
However, later in the night, the Greek news sent markets into a tailspin. European equities plunged back into the red, peripheral bond spreads soared, and European currencies were shunned in favour of the relative ‘safe-haven’ of the USD.
The EUR/USD led the declines, plunging around a cent to 4-month lows around 1.2730. Despite the EUR’s woes, the highly ‘risk-sensitive’ CAD and AUD held up admirably against the strengthening USD. This likely reflects the fact commodity prices managed to largely escape unscathed from last night’s EUR-centred carnage.
It’s worth noting, the collapse of last night’s Greek talks should not have been news. Greece was always going to find it difficult to string together a government.
It’s more that a higher chance of a Greek exit from the EU is now being factored in.
Greece is certainly not a big player in the Eurozone (it accounts for only 2.5% of Eurozone GDP), but an exit would be seen as raising contagion risks (to the likes of Spain and Portugal) and be a highly destabilising force on the EMU.
We suspect ongoing sovereign solvency worries, as well as economic underperformance relative to the US, will see the EUR/USD continue to grind lower in coming sessions. Key support is eyed towards January’s 1.2625 lows.
Tomorrow morning’s FOMC minutes stand out as a key focus for markets (apart from the usual European headline watching). The Fed upgraded its view of the US economy in the last statement, so markets will be looking for the Fed doves to make some concessions. Such a result has the potential to add to currently positive USD sentiment.
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1 Comments
I do hope they don't pay too much for these colums as they are just so much ass covering doublespeak on if and maybe served up with your usual "Risk Gravy" liberaly smothering any obvious trends brought on by factual scenarios.....
In a nutshell Dan ...you should have put your nads on the line and picked the slide in the NZD/ U.S at least 6 weeks back.....and it would not even have been that clever...just observant.
You would have the creds..the readers ...my boy, you would have had it all.
Did ya get some Dan....? uh did ya..?
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