Currency markets eye Seoul G20 Summit

By Mike Jones

The NZD/USD has spent the past 24 hours trading choppily inside a 0.7820-0.7910 range. Currency markets struggled a little for direction overnight. The NZD/USD was firmly off markets radar and, as such, mostly tracked gyrations in EUR sentiment.

Early in the night, the NZD/USD slipped to almost 0.7800 as rising tensions over European sovereign debt knocked back the EUR and undermined investors’ risk appetite.

Not only are investors worried about a possible sovereign default in Ireland, but Portugal has returned to the headlines over concerns about upcoming debt refinancing. Portuguese and Irish sovereign CDS spreads widened to fresh all-time highs overnight as a result.

However, the lows in the NZD/USD around 0.7800 didn’t last for long. Later in the night, solid demand for EUR, AUD and NZD from Asian and Middle Eastern real money accounts helped most of the major currencies recover. EUR/USD rose from 1.3820 to nearly 1.3940 dragging NZD/USD back above 0.7850.

It’s worth noting, uncertainty about the impact and severity of the bacterial disease found on some North Island kiwifruit vines has tended to weigh on the NZD over the past couple of days. Indicative of such, NZD/AUD has spent the past two days drifting towards 0.7750, after opening the week around 0.7850. The impact on the currency from here will depend on how damaging the strain of the disease is found to be.

An announcement from MAF on this front is expected over the next few days. For today, keep an eye out for the RBNZ’s Financial Stability Report at 9am.

Across the Tasman, consumer confidence and home loan data will provide an update on the strength of Australian domestic demand. However, this afternoon’s Chinese trade data has the greatest potential to influence the AUD and NZD. An October trade balance above the US$25b analysts expect could see NZD/USD test initial resistance around 0.7900. Solid support should be found on any dips towards 0.7750.

Majors

Movements in currency markets were something of a mixed bag overnight. The USD ended the night mildly firmer thanks to a generalised bout of EUR selling. The first part of the night was all about a weaker EUR. European sovereign debt concerns have increasingly gripped market attention over the past week, cooling some of the recent enthusiasm towards the EUR.

Overnight, Portuguese and Irish sovereign CDS spreads (a proxy for default probability) widened to fresh all time highs as investors worried political wrangling will prevent Ireland from implementing the required fiscal austerity measures in 2011.

This was despite an attempt to soothe market fears from European monetary affairs commissioner Rehn, who said Ireland had not yet asked for any EU aid. Heavy EUR/CHF selling dragged EUR/USD from 1.3920 to nearly 1.3820, paving the way for broader USD gains.

Rising “safe-haven” demand also helped underpin the USD. Along with renewed fears over European sovereign credit, news the Chinese State Administration of FX is imposing tighter controls on capital flows also acted to cool investors’ risk appetite.

Global equity markets struggled. As a result, the “safe-haven” currencies of the JPY and CHF were the strongest performing currencies of the night. USD/JPY drifted from 81.20 down to 80.50, before bouncing late in the night.

Meanwhile, USD/CHF dipped from above 0.9660 to below 0.9620. The GBP/USD tended to suffer more than most. UK September industrial and manufacturing production figures were both fairly close to market expectations (IP +0.4%m/m as expected, manufacturing production 0.1% vs. 0.2% expected).

However, rumours the Bank of England’s quarterly inflation report (due tonight) would contain dovish undertones saw GBP/USD dive from above 1.6150 to around 1.6050.

Late in the night, a recovery in the EUR acted to stymie USD gains somewhat. Rumoured EUR demand from Asian central bank and Middle Eastern real money accounts helped EUR/USD bounce from 1.3840 to around 1.3940, spurring modest gains in most of the major currencies.

Looking ahead, markets are beginning to gear up for the Seoul G20 summit, which kicks off on Thursday. Indeed, the political wrangling has already begun with both China and Germany repeatedly voicing concern over US exchange rate and trade policies in recent days.

Nevertheless, a strong result from today’s Chinese trade data would no doubt redirect the focus back onto China’s “undervalued” Yuan. Support on the USD index is seen towards 76.30 with resistance around 77.80.

* Mike Jones is part of the BNZ research team. 

All its research is available here.