Opinion: Tight range for NZ dollar

By Mike Jones The NZD/USD has spent most of the past 24 hours trading choppily in a 0.6930-0.7040 range. Early in the night, stabilising risk appetite and modest gains in NZD/AUD underpinned a small recovery in NZD/USD. Concerns about European sovereign solvency eased somewhat. Not only did the EU and IMF confirm Greece’s €14.5b cheque is in the mail, but Ireland easily sold €1.5bn worth of government bonds. European equities posted gains of 0.9-3.7%, underpinning a broad improvement in risk appetite and a push in NZD/USD above 0.7040. Nevertheless, last night’s gains in NZD/USD proved to be short-lived. A surprise announcement from Germany that it will ban naked short-selling on certain stocks, bonds and CDS inspired widespread panic. US stocks reversed earlier gains, EUR/USD tumbled nearly 2 cents and ‘risk-sensitive’ currencies like the NZD were sold aggressively as investors flocked back into ‘safe-haven’ assets. From above 0.7030, NZD/USD slipped back to 2½ month lows around 0.6950. Ahead of the NZ Budget tomorrow, don’t overlook today’s six-monthly Financial Stability Report from the RBNZ. This should be a generally positive report on the health of NZ’s financial system, and may contain some insights into the RBNZ’s thinking about recent difficulties in Europe. For today, we suspect the current backdrop of subdued risk appetite and softer equity markets will cap NZD/USD bounces to around 0.7040. Initial support is seen at 0.6920. Majors After dribbling lower for the most of the night, a late flare up in risk aversion saw the USD end the night stronger against most of the major currencies. The first part of the night was characterised by a modest recovery in investors’ risk appetite. Sentiment was buoyed by easing concerns over European sovereign solvency. Ireland successfully sold €1.5bn of government bonds. Indeed, demand outstripped supply by a factor of three. In addition, Greece received its €14.5b loan from the EU and IMF, enabling it to repay a €8.5b loan maturing this week. Greek 10-year bond spreads eased around 35bps to 475bps (over German Bunds), European stocks rose 0.9-3.7%, and EUR/USD crept up from below 1.2350 to around 1.2400. Sentiment towards the EUR may have also been bolstered by Poland’s confirmation it could adopt the euro as early as 2014. Not even the slightly weaker-than-expected German ZEW sentiment survey (45.8 in May vs. 47.0), or signs of softer demand at Spain’s latest T-bill auction, managed to disrupt the more positive EUR sentiment. With risk aversion easing, investors trimmed positions in ‘safe-haven’ currencies like JPY and USD, paving the way for modest gains in most of the majors. GBP/USD rose from 1.4440 to nearly 1.4520 – helped by April’s stronger CPI data (3.7%y/y vs. 3.5% expected), USD/JPY jumped from 92.50 to almost 93.00, and AUD/USD climbed above 0.8780. However, later in the night, risk aversion returned with a vengeance. Investors were spooked by a German announcement it will ban naked short-selling (essentially selling a financial instrument without owning it) in stocks of the country's 10 “most important financial institutions.” The ban will also apply to government bonds and CDS. The move only served to highlight fears the European sovereign debt crisis could morph into the second leg of the global credit crisis. (When short selling was banned during the GFC stocks fell a further 45%). As a result, US equity markets went into reverse, and the VIX index (a proxy for risk aversion) jumped from 30% to above 33%. EUR/USD slumped 2c to nearly 1.2160 (a fresh 4-year low), dragging the likes of GBP, AUD, and NZD all lower in the process. Last night’s US data was fairly mixed. April housing starts rose to a 1½ year high (5.8%m/m vs. 3.8% expected). But an 11.5%m/m drop in April building permits (flat expected), to 6-month lows, quashed any optimism the US housing market may be picking up a head of steam. April producer prices came in roughly as markets had anticipated (5.5%y/y vs. 5.6% expected).