Economic uncertainties in China and political uncertainties in Korea along with falling commodity prices ratchet down expectations for Fed rate hikes. Safe haven currencies gain

By Kymberly Martin

On Friday, European currencies outperformed against a weaker USD. The NZD/USD extended its recent rebound to end the week close to 0.6690.

A serious collapse in global risk appetite was the key theme for markets on Friday. Our global risk appetite index (0-100%) has plunged to 23% from 59% earlier in the week.

Equities fell by close to 3% on either side of the Atlantic, following on from a more than 4% fall in the Shanghai Composite. This has taken the index back to its early-July lows, ahead of intervention measures by Chinese authorities designed to shore up the equity market.

Over the weekend, authorities in other Asian countries have announced interventionist measures to help support their equity markets. Tensions on the Korean peninsula also remain high with talks continuing between both sides in the early hours of this morning.

The global oil price has also continued to fall. The WTI oil price now sits just above US$40, at its lowest level since 2004. This appears to reflect, not only abundant supply, but increasing global growth fears. A disappointing China PMIon Friday afternoon did not help sentiment. Against this backdrop the market has ratcheted down its expectations for future Fed rate hikes. This likely contributed to the underperformance of the USD on Friday. The USD index, at 95.00, is now at its lowest level since end-June.

The EUR strengthened against the soft USD. Solid German manufacturing PMI data may have also helped quell fears about the state of the region’s growth engine. The EUR/USD traded up to end the week around 1.1390, its highest level since mid-June.

The CHF and JPY also outperformed on Friday, likely benefitting from their perceived ‘safe haven’ status. However, it was a little more surprising that the NZD held up, instead of succumbing to its engrained perceptions as a ‘risks sensitive’ currency. The NZD/USD appears to be benefitting from continued unwinding of NZD short positions. It ended the week at 0.6690, close to its late-July highs. Above this level, resistance is eyed at the early-July highs of 0.6770.

Today’s focus domestically will be a scheduled speech by RBNZ Deputy Governor Stevens on the NZ property market. This is a hot topic, and could well cover the issue of rural property in addition to the broadening pick-up in residential property.

The NZD has also outperformed against the AUD. The NZD/AUD ended the week around 0.9140. The AUD was initially jolted lower after the disappointing China PMI reading on Friday afternoon. However, it grappled its way higher in the evening, toward 0.7360, before drifting off to end the week below 0.7320. The market still looks for further RBA cuts. It prices that the RBA’s cash rate will be cut 1.72% by mid next year, from its current level of 2.00%. In this regard, remarks by RBA Governor Stevens on Wednesday will likely be closely followed

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