by Mike Jones
NZD
After falling steadily for most of the week, the NZD/USD spent the overnight session consolidating in a relatively tight 0.7630-0.7680 range.
On the face of it, last night’s financial market developments should have delivered an even weaker NZD. The news from Europe was as dour as ever (see Majors), spurring further widening in peripheral European bond spreads, and widespread equity market weakness.
Risk appetite softened further (our index now sits at 43.4%) and commodity prices mostly fell. Ongoing nervousness about the global backdrop ensured the ‘safe-haven’ USD and JPY remained in demand.
The fact the NZD/USD held up despite all these headwinds likely reflects the fact a) it has fallen so far, so fast and b) speculative players are already heavily short NZD. As we noted yesterday, many technical indicators suggest the currency is now ‘oversold’.
After all, since the beginning of May, the NZD/USD has tumbled just over 7% while the NZD TWI is down around 4.5%.
We noted yesterday that falling local interest rates and generalised risk aversion should keep the NZD/USD heavy in the short-term.
However, the same cannot be said of the NZD/AUD. Notably, the NZD/AUD has been falling even as NZ-AU interest rate differentials - the most important short-term driver of the cross – have been rising. As a consequence, our short-term valuation model now suggests the NZD/AUD is ‘cheap’ on the basis of fundamentals.
The model estimates a ‘fair-value’ range of 0.7800-0.8000. So, in the absence of marked falls in NZ-AU rate differentials, we doubt NZD/AUD dips below 0.7700 will be sustained. Perhaps the more likely outcome is a creep back up towards ‘fair-value’.
For today, news and events are pretty thin on the ground. There is just Chinese business sentiment and property prices data to watch for (due around 1:30pm NZT). Market focus remains on all things Europe.
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Majors
It’s been a sleepy session in currency markets. The major currencies generally tracked narrow ranges with most European participants out for the Ascension Day Holiday. The USD index consolidated in a 81.20-81.70 range.
European nervousness continues to swirl, providing stiff headwinds for market sentiment. Indeed, the overnight European news was less than encouraging.
Reports that over €1b in deposits have now been withdrawn from Spanish Bank Bankia unnerved investors, as did the ECB’s decision to exclude four Greek banks from its liquidity operations.
The FT reported Moody's is preparing a sweeping downgrade of Spain's banking sector and the Trioka was rumoured to be examining contingency plans for Portugal in the event of a Greek EMU exit.
European equity indices continued their terrible run. The DAX, FTSE and CAC 40 all slipped 1.2%, while the Spanish IBEX fell 1.1% (to be down 24% since mid March). US stocks soon joined the fray after US jobless claims and the Philadelphia Fed manufacturing index both undershot analyst expectations.
The S&P500 is currently down 0.75%. The VIX index (a proxy for risk aversion) climbed from 22.5% to 23.5% – the highest level this year.
Despite all this negativity, currency markets barely stirred. Admittedly the big down moves in many of the majors – notably AUD, EUR, and NZD – had begun to look exhaustive ¬so perhaps we are just seeing some consolidation before the next move lower.
There was a bit more action in JPY. Indeed, the combination of yesterday’s stronger Japanese Q1 GDP figures (1.0%q/q vs. 0.9% expected) and the failure of the Bank of Japan to follow through on rumours of additional easing has seen the JPY outperform. USD/JPY gapped from 80.20 to almost 79.20 overnight, with particularly heaving selling of CAD/JPY and GBP/JPY.
For today, a relatively light data calendar might encourage a bit more consolidation. However, negative European news continues to mount and investors remain risk averse. As a result, we may see EUR/USD move lower to test support at the December 1.2625 lows before long.
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2 Comments
Good to see the dollar down more than the TWI; the most pain free way for our exporters to stay in business. Its a shame with the government and Reserve Bank policies on interest and exchange rates, that we've totally blown the last three years of the highest dairy and other ag prices in decades. Maybe with this drop, we might start to contemplate the current account, although now have to chase our tail in the tough times.
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