by Mike Jones
NZD
The Spanish honeymoon proved to be even more fleeting than expected, so risk sentiment has retreated. The NZD/USD has given up most of yesterday’s gains but, consistent with the improved fundamentals we noted yesterday, has held up better than most.
The market enthusiasm generated from the weekend’s Spanish bank bailout package evaporated overnight (see Majors).
Spanish government bond yields soared to new heights, prompting a sharp reversal across global equity markets. Moreover, contagion fears were piqued by Italian 10-year yields breaching 6%. Yesterday’s 1-1 Spanish/Italian football draw could prove to be telling.
As risk appetite again lost steam, the NZD/USD was dragged back to around 0.7700. NZD/JPY now trades closer to 61.20, down from 62.00 yesterday.
In contrast, the NZD/AUD has etched a path higher over the past 24 hours as NZ-AU interest rate differentials continue to slowly move in favour of the cross. NZ-AU rate differentials should continue to slowly normalise this year, as Australian economic growth slows, and the grinding NZ economic recovery continues.
If this view is to be believed, the current level of the NZD/AUD represents good value for those looking to hedge against an appreciation this year. We continue to forecast NZD/AUD at around 0.8300 by year end.
We’re looking for a tepid 0.3% gain from this morning’s NZ electronic transaction figures. We’ll also get further insight into the housing sector with the May numbers from both the Real Estate Institute (10:00am) and QVNZ (midday).
These should look fairly perky. Across the ditch, the market will be paying close attention to this week’s NAB Business Survey for May – in light of the RBA easing and the barrage of improved data last week.
However, the chances are none of this will greatly impact the NZD/USD, which remains hostage to global gyrations in appetite for ‘risky’ assets.
The approach of next weekend’s Greek election, and the uncertainty it brings, may keep things a little subdued on this front. We suspect the NZD/USD will continue to find it tough going towards 0.7800. Near-term support is eyed around 0.7670.
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Majors
The good cheer stemming from Spain’s bank bailout package quickly evaporated overnight. Sentiment deteriorated steadily as the night wore on with a sharp reversal in the EUR/USD dragging the major currencies lower. The USD recouped all of Monday’s losses.
The short-lived Spanish celebrations surprised no one. The knee-jerk rally rapidly ran out of puff overnight, as markets decided the Spanish bank bailout wasn’t a panacea for the nation’s debt issues. The lack of additional details about the package irked investors, as did chatter it could eventually trigger credit default swaps.
Fitch downgraded Santander (the largest bank in the Eurozone) to BBB+ and European officials were reported as making contingency plans for Grexit (a good thing?), adding to the negativity.
Spanish 10-year bond yields pushed up to new highs above 6.5%. And after opening some 5% higher, the Spanish IBEX was soon back peddling to close in negative territory. US stocks and commodity prices also reversed early gains to finish the night well into the red.
Against a backdrop of rising risk aversion and renewed Europe sovereign solvency worries, the EUR/USD was knocked 1½ cents lower to trade around 1.2500. Most of the other majors were dragged lower in sympathy. The AUD/USD is back below 0.9900 having had a sniff at parity earlier in the night.
Looking ahead, there’s a few snippets of data to watch out for tonight. But we suspect market attention will begin to turn to the weekend’s Greece election and what it means for the chances of a Grexit.
Risk appetite may well remain subdued as a result. In the short-term we’d expect EUR/USD bounces towards 1.2550 to attract sellers. Initial support may be found 1.2370.
Other news: French industrial production beats expectations in April (1.5%m/m vs. -0.1% expected). Fed’s Lockhart plays down need for additional FOMC easing – “I’m not convinced the circumstances quite yet call for additional action”.
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