G-20 meeting, Chinese 'data dump' and Australian employment figures in focus

By Mike Jones

Yesterday’s slide in the NZD was arrested overnight. After plunging to almost 0.7750 yesterday afternoon, NZD/USD recovered to around 0.7800 overnight amid solid buying of NZD/EUR and strong gains in GBP and CAD.

On the face of it, yesterday’s attempt from RBNZ Governor Bollard to talk down the currency would appear to have borne fruit. Not only did the Governor reiterate the RBNZ’s concern at the rising currency, but he even went so far as to say that the market had misinterpreted strength in recent data.

As markets quickly moved to price out any chance of a January RBNZ hike, the NZD/USD was pitched about 1 cent lower to around 0.7760.

But Governor Bollard certainly didn’t do all the work. Indeed, yesterday’s NZD losses were more about a mild paring of global risk appetite after China raised bank reserve requirements 50bps. Our risk appetite index (which has a scale of 0-100%) slipped to around 70%, from above 72% at the start of the week. The associated lift in “safe-haven” demand bolstered the USD at the expense of the NZD and AUD yesterday.

Overnight, the NZD/USD recovered some of its losses. Supporting NZD sentiment, NZD/EUR climbed from 0.5650 to almost 0.5700 as investors trimmed EUR positions amid worsening European sovereign debt fears. A spurt higher in GBP/USD after the Bank of England’s upbeat inflation report also buoyed demand for “growth-sensitive” currencies like the NZD and AUD.

Looking ahead, there is a fair bit of event risk for currency markets over the next few days. Ahead of tonight’s eagerly anticipated G20 meeting, markets will be looking out for the latest Chinese data ‘dump” (due at 3pm NZT) and Australian employment figures for October (1:30 pm).

All up, we suspect a break above 0.7920 resistance will be a bridge too far for the NZD/USD in the short-term. This is particularly so given ‘fundamental’ support for the NZD has faded in recent days. NZ-US 3-year swap spreads have dived to 330bps, from almost 365bps last week.

Majors

The USD continued to grind higher overnight, reflecting renewed “safe-haven” demand and rising US bond yields. Creeping risk aversion has been the main theme in currency markets over the past 24 hours. Not only were investors spooked by China’s decision to raise several banks’ reserve requirements, but widening European sovereign credit spreads continued to cause angst. Overnight, a London clearing house lifted margin requirements on Irish sovereign bonds by 15%, indicative of their higher risk profile.

And although Portugal managed to easily raise €1.2b at last night’s bond auction, investors were quick to point out the much higher yields Portugal must now pay. Reflecting the above developments, Irish and Portuguese sovereign credit spreads widened to fresh all time highs and EUR/USD dribbled off to around 1.3700, from closer to 1.3800 at the start of the night. Heavy EUR/GBP selling also weighed on the EUR.

The Bank of England last night delivered a slightly more upbeat than expected quarterly inflation report. Most notably, the BoE raised its near-term inflation forecasts, suggesting little room for further monetary easing anytime soon – a view we have been espousing for some time. The yield on short-sterling December 2012 futures jumped over 20bps in the wake of the report, propelling GBP/USD from below 1.6000 to nearly 1.6100 and EUR/GBP to 1½ month lows below 0.8560.

Last night’s US data continued the recent improving tone. Not only did the September trade deficit come in slightly below expectations, but jobless claims recorded a surprise drop to 435k in the week to November 6 (450k expected). Along with worries about lower demand at last night’s 30-year Treasury bond auction, this saw US bond yields continue to climb. Indeed, 10-year Treasury yields lifted a further 8bps to 2.74%, to be up nearly 30bps over the past week. It’s worth noting, the Chinese Yuan yesterday rose to the highest level since the July 2005 PBOC revaluation.

The PBOC set the midpoint of the USD/CNY’s trading band at 6.6450, down 130 points from the previous day. The move is most likely posturing ahead of tonight’s G20 summit, given more pressure is expected to be applied on China (mostly from the US) to allow the CNY to appreciate at a faster rate.

Looking ahead, tonight’s G20 meeting looks set to occupy most of markets’ attention, but today’s Chinese data dump and Australian employment will also be worth watching.

* Mike Jones is part of the BNZ research team. 

All its research is available here.