Opinion: NZ$ drops under 72USc on global risk flight, but jumps to 79 Aussie; European contagion fears dominate

By Mike Jones The NZD lost some of its lustre last night. A sharp reassessment of global risk appetite dragged NZD/USD from around 0.7300 to a smidge below 0.7200. The RBA hiked its cash rate 25bps to 4.5% yesterday, as most expected. But the tone of the accompanying statement came as a disappointment to those looking for the RBA to keep ramping up rates in coming months. Rather, it looks as if the RBA may take stock for a while and assess the economic landscape, content it has now returned rates to “around average levels”. The lack of a smoking gun to signal future RBA rate rises tended to undermine the AUD/USD overnight. And it provided further grounds for speculative and leveraged players to square up ‘short’ NZD/AUD positions. NZD/AUD was pitched from below 0.7900 to almost 0.7930 accordingly. NZD/AUD has surged nearly 3 cents over the past two weeks amid a near 20bp increase in NZ-AU 3-year swap rate spreads (to -76bps). We have been warning for some time that NZD/AUD was simply too low at 9½ year lows around 0.7600. And with the RBA out of the way and the RBNZ confirming that OCR hikes can be expected “in coming months”, we suspect we have indeed seen the bottom in NZD/AUD for now. In the near-term we expect some consolidation of recent gains. Our short-term valuation model suggests a “fair-value” NZD/AUD range of 0.7700-0.7900. While the firming NZD/AUD helped underpin NZD/USD last night, it wasn’t enough to offset a spike in global risk aversion. Markets were sent into a tailspin as rumours Spain had asked for a €280b bailout package compounded fears Greece’s fiscal crisis is spreading (the rumours were later denied). Global stocks plunged 2.5-3.0%. As investors’ risk appetite deteriorated, investors shunned “growth-sensitive” currencies like the NZD in favour of the USD and JPY. Sentiment towards the NZD wasn’t helped by last night’s 1.2% dip in wholemilk prices at Fonterra’s latest milk price auction. NZD/JPY dived from above 69.00 to below 68.00 and NZD/USD slipped back to 0.7200. Majors The USD strengthened against nearly all of the major currencies overnight, supported by both rising risk aversion and generally upbeat US economic data. A renewed wave of pessimism swept over markets last night as fresh concerns over contagion from the Greek fiscal crisis saw risk appetite plummet. Equity markets around the globe were crunched. The DAX and the FTSE slumped 2.6%, while the S&P500 is currently down 2.3%. Meanwhile, the VIX index (an index of volatility used to proxy risk aversion) spiked above 25% for the first time since mid-February. Rumours and doubts were flying around all over the place. First, a German government official suggested the new bailout package will not be enough to cover Greece’s 2010-2012 borrowing requirements. Markets are already worried Greece will not be able to implement the austerity measures needed to gain access to the bailout. Later, market focus turned to Spain, and rumours it has asked for a €280b bailout and is on the cusp of a sovereigns ratings downgrade. Both rumours were later denied, but this did little to alter markets’ mood. Indeed, Spanish stocks plunged nearly 6% last night and its CDS widened. Soaring risk aversion and weakness across equity markets saw investors ditch “growth-sensitive” currencies in favour of “safe-haven” currencies like the USD and JPY. JPY crosses were sold across the board. USD/JPY eased off 9-month highs around 95.00 to below 94.50. Meanwhile, AUD/JPY plunged more than 2% following a slump in commodity prices (the CRB commodity price index fell 2.3% last night) and yesterday’s less-hawkish sounding RBA statement. Nevertheless, it was hardly surprising that EUR bore most of the brunt of the stronger USD. Indeed, EUR/USD was dragged from 1.3200 to fresh 12-year lows of nearly 1.3000. The next key support level for EUR/USD is 1.2890. We suspect this will be tested in coming days. Losses in GBP were limited by a better-than-expected read on manufacturing activity in the UK (the April PMI rose to 58.0 vs. 57.5 expected) and the latest Reuters political poll, which suggested the Conservatives may yet be able to win a majority in Thursday’s election. After falling in lock-step with the EUR for most of the night, GBP/USD bounced off support at 1.5100 and ended the night closer to 1.5180. Adding to the firmer USD tone last night was another batch of upbeat US data. March factory orders rose 1.3%m/m (flat expected) and March pending home sales built on February’s strong gains (+5.3%m/m vs. 5.0% forecast). *All of the research produced by the BNZ Capital team of economists is available here