Near term support for NZD back at around mid 2010 lows; risk aversion positive for USD & JPY; Chinese shares continue to tumble

By Kymberly Martin

The USD and JPY were beneficiaries of heightened risk aversion overnight. The NZD/USD has slipped to trade at 0.6660 currently.

Markets struggled under the weight of a trifecta of developments overnight. There were few signs of hope in Greek negotiations.

Chinese equities continued to tumble despite recent efforts by authorities to improve sentiment.

Finally, the fall in global oil prices continued, before an early morning rebound.

Overall, our global risk appetite index (scale 0-100%) has fallen a little further, to 47%.

In this backdrop, the JPY and USD have outperformed in their traditional role of ‘safe haven’ currencies. The USD also benefitted as a direct result of the slump in the EUR, a Greece’s exit from the single-currency appears increasingly plausible. The EUR/USD has slipped to trade at 1.0960 this morning.

The GBP/USD was also dragged lower by the EUR overnight. It experienced a very short reprieve after the release of UK industrial production data that beat expectation. However, its descent soon continued, taking the GBP/USD to below 1.5450 currently.

However, the weakest performing currency over the past 24-hours (falling 1.6 % versus the USD) has been the NOK. It was weighed on by the continued slump in the oil price and data showing Norway’s manufacturing production dropped 2.1%m/m in May. Some suggest a rate cut from the Norges Bank as early as its next meeting in Sept.

The AUD/USD broke through its recent lows overnight, briefly dipping to 0.7400, its lowest level since May-2009. It has subsequently returned to sit at 0.7430.

The RBA surprised few yesterday, leaving its cash rate at 2.0% and its statement largely unchanged. It continued to see further depreciation in the currency as “both likely and necessary…given significant declines in key commodity prices”.

The NZD/USD was on the back-foot from yesterday morning following the release of the Q2 QSBO, which affirmed the slower growth tone shown by other domestic indicators.

The NZD also weakened overnight in the backdrop of heightened risk aversion and demand for the USD. The NZD/USD fell toward 0.6620 last evening before grappling its way back to 0.6660 currently.

Our revised NZD forecasts, published yesterday, now see the NZD/USD reaching a trough in the low 60s by mid next year. Near-term support remains at the mid-2010 lows, approaching 0.6560.

However the NZD has strengthened on many of the crosses overnight, including versus the AUD and EUR. But the NZD/JPY has continued to slip as ‘safe haven’ appeal supports the JPY. The NZD/JPY fell toward 81.00 in the early hours of this morning, before returning to trade at 81.60.

The fate of the NZD over the next 24-hours will likely be in the hands of offshore developments. Although now dated, tonight’s Minutes from the US Fed’s June meeting may influence the USD.

In addition, a lack of positive developments out of the Eurozone will likely support the USD at the expense of ‘risk sensitive’ currencies such as the NZD.

Also look out for a speech by ECB’s Coeure on” the role of the Euro”.

Kymberly Martin is on the BNZ Research team. All its research is available here.