Risk appetite rising on expected global central bank actions

by Mike Jones

NZD

The NZD/USD continued its steady march towards 0.8000 overnight.

A more conciliatory attitude towards ‘risky’ assets allowed the currency to breeze through the 200-day moving average at 0.7955.

Investors were definitely in a mood to play up the positives overnight. Not only did expectations of more Fed policy easing juice up risk appetite, but investors were also encouraged by chatter a workable Greek government is close to being announced. And instead of worrying about weak European data, this was seen as increasing the chances of more policy easing there.

Global equity markets rallied, commodity prices rose, and ‘growth-sensitive’ currencies like the NZD and AUD outperformed at the expense of the ‘safe-haven’ USD.

A fairly positive result from last night’s global dairy auction probably helped shore up NZD sentiment. Milk prices eased 0.5% from the previous auction. Importantly, this means prices held onto nearly all of the previous auction’s 14% surge.

Keep an eye out for today’s March quarter NZ balance of payments data (BoP). We’re expecting a year-to-March current account deficit of 4.7% of GDP, from 4.1%.

The growing picture of imbalance in the NZ economy is one that may attract increasing attention over the coming year. However, for now, the BoP data will likely be glossed over as investors look ahead to tomorrow morning’s FOMC policy meeting. Some expectation of additional quantitative Fed easing is now priced into markets.

So if the Fed disappoints we’ll likely see a stronger USD knock the NZD/USD back below 0.7900. However, full blown QEIII from the Fed would likely pave the way for an eventual retest of 0.8200. 

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Majors

Hopes more central bank easing is on the way and the near finalisation of a Greek government have underpinned a clear improvement in risk appetite over the past 24 hours. Consistent with the more buoyant backdrop, the ‘safe-haven’ USD and JPY have underperformed. 

Markets are primed for some form of additional Fed easing to be announced tomorrow morning (4:30am NZT). Across the Atlantic, the odds of more policy easing from the Bank of England and ECB were also seen as having increased following weaker than expected readings of the German ZEW survey and UK CPI last night.

Growing expectations of more global policy easing underscored solid gains in equity markets and risk appetite. Investors also took comfort from the likely cobbling together of a Greek coalition government. This could be announced as soon as tonight.

The S&P500 is currently up around 1%, following a positive lead from Europe (the EuroStoxx 50 rose nearly 2%). The CRB commodity price index has climbed over 1% with the VIX index (a proxy for risk aversion) dribbling lower through the night (to end up around 18%).

The combination of easing risk aversion and pre-FOMC positioning weighed on the USD as investors trimmed long positions. Most of the majors were pushed higher as a result. The EUR/USD was launched from 1.2600 to almost 1.2720, the GBP/USD climbed around ¾ of a cent to 1.5740, and the AUD/USD rose above 1.0200 for the first time since early May.

Looking ahead, the G20 communiqué is due to be released shortly. Expect the usual well meaning but essentially meaningless headlines, as well as confirmation of a modest increase in commitments to the IMF (US$456b, up from US$430). We doubt markets will pay much attention to G20, with all eyes now on the Fed. An extension of operation twist without additional QE would likely disappoint the market, prompting some knee-jerk buying of US dollars. If QEIII is announced, expect US bond yields and the USD to continue to suffer.

Other news:
UK CPI fell to 2.8% y/y against a 3% consensus, bringing inflation below the BoE’s average forecasts and keeping the door open to more QE.*German ZEW 33.2 vs. 39.0 expected. *Spain sold €2.4b of 1-year notes at 5.07%, well above the 2.99% yield at the previous auction. *China commerce minister says “I personally think that the June situation is turning for the better". *US housing data was mixed, with building permits strong (7.9%m/m vs. 1.0% expected), but housing starts weak (-.8%m/m vs. 0.7% expected).

Event Calendar:
20 June: G20; NZ current account; UK BoE minutes; 21 June: FOMC meeting & Bernanke speaking; Eurogroup meeting; European PMIs; Auditors publish Spanish banks’ recap needs; NZ GDP; US jobless claims; US Phillie Fed; 22 June: NZ bus confidence; NZ credit cards; EU finance minister; GE IFO; EU leaders meet.

All its research is available here.