Opinion: Risk aversion more important than fundamentals; Greece and Spain risk the 'euro experiment'

by Mike Jones Sharply lower risk appetite and continued nervousness about the global recovery have taken a toll on the NZD over the past 24 hours. From levels close to 0.6950 this time yesterday, NZD/USD has slipped back to around 0.6890. Yesterday's February NBNZ business survey revealed businesses to be even more upbeat than at the end of last year, underpinning our story of strengthening GDP recovery this year. We had expected a slight further fall in net confidence. It actually increased to +50.1, from +38.5. Still, economic fundamentals have mattered little in currency markets over the past 24 hours. Instead, the NZD took its cues from a deterioration in risk appetite as concerns over European sovereign solvency returned to the fore. There were more warnings from ratings agencies overnight that a failure to stick to its austerity plan would see Greece suffer another sovereign downgrade. Meanwhile, a WSJ article suggested Spain is also a looming threat to the Eurozone. And last night's decidedly lacklustre batch of economic data served to reinforce broader fears about the fragility of the global recovery. Our risk appetite index fell back to 55%, from a touch above 60% at the start of the week. Equity markets are a sea of red, while lower risk appetite also weighed on commodity prices (the CRB index is down around 1.5%). Against this backdrop, investors shunned high-yielding currencies like the NZD, and stampeded back into "˜safe-haven' currencies like the USD and JPY. NZD/JPY slipped from above 62.50 to nearly 61.00, dragging NZD/USD below 0.6900 in the process. We're looking for a marginal surplus (of $70m) in today's trade balance data for January. January building consents are also due for release. Nevertheless, in the absence of a major surprise, direction for the NZD is expected to remain subject to gyrations in risk appetite and offshore equity market sentiment. Initial support is expected towards 0.6820. Majors The USD and JPY were the strongest performing currencies overnight as heightened risk aversion prompted increased demand for "˜safe-haven' assets. Fear and risk aversion have been the dominant drivers of currencies over the past 24 hours. Concerns over Greece's fiscal crisis returned to the fore. Ratings agency Moody's said a ratings change was likely if Greece failed to deliver on its deficit cutting plans. Meanwhile, Germany's debt agency head Daube said if one member of the EU went bankrupt, this would spell the end of the "euro experiment". Greek 5-year sovereign CDS spreads rose over 10bps to 385bps last night. Adding to the risk aversion climate, a Wall St Journal article suggested Spain could be the next European country to run into serious strife. Not only were investors worried about European sovereign solvency, but last night's economic news ensured nervousness about the global recovery continued. German unemployment held steady at 8.2% in February, as expected. But US jobless claims were much worse than expected, rising to 496,000 in the week ending February 21 (460,000 expected). And while January's headline US durable goods orders were seemingly upbeat, analysts were more focused on the weaker ex-transportation figures (-0.6%m/m vs. 1.0% expected). Reflecting worries about European sovereign solvency, the VIX volatility index (which is commonly used as a risk aversion proxy) spiked from around 20.5% to 22.5%. Sharply lower risk appetite took a heavy toll on equities and commodity prices. European equity indices slumped 1.2-2% and the S&P500 is currently down 0.7%. The CRB index (a broad measure of commodity prices) fell nearly 1.5%, led by a 2.5% fall in oil prices. Against a backdrop of free-falling equities and commodity price weakness, "˜growth-sensitive' currencies were sold heavily last night as investors returned to the relative "˜safe-haven' of the USD and JPY. CAD/USD, AUD/USD and GBP/USD all slipped over 1%. USD/JPY fell nearly 1.5% from 90.20 to flirt with 2-month lows below 89.00. Still, the most obvious weak spot was GBP/USD, which plunged to fresh 9-month lows around 1.5200. Not only was Q4 business investment data terrible (-5.8%q/q vs. +0.1% expected), but Bank of England policy maker Barker said the UK recovery is "not going to be particularly strong." For today, we suspect the general backdrop of deteriorating risk appetite and nervousness about global growth will keep the USD index supported on dips towards 80.40. Resistance is eyed towards 81.20. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.