By Mike Jones
The NZD/USD has spent the past 24 hours trading choppily inside a 0.7780-0.7880 range.
The NZD started the night on the front foot. Not only did yesterday’s swathe of Chinese data reaffirm Asian growth momentum, but a mildly disappointing Australian employment report spurred a sharp rally in NZD/AUD. Sure the 29.7k jobs added in October exceeded analysts’ expectations (of 20k).
But with all of this employment growth coming in part time jobs, and the unemployment rate rising to 5.4% from 5.0%, expectations of a December RBA rate rise tended to recede in the wake of the release.
The NZD/AUD was propelled from 0.7780 to around 0.7830 as a result. According to our short-term NZD/AUD valuation model, NZD/AUD looks “overvalued” around these levels. Based on NZ-AU 3-year swap spreads, NZ-AU commodity prices and relative business confidence, the model currently estimates a 0.7400-0.7600 “fair-value” range. In the absence of further uplift in NZ-AU interest rate spreads, we would expect NZD/AUD to head back towards this range in coming weeks.
Overnight, positive sentiment towards the NZD evaporated. The start of the G20 summit was largely ignored by markets as mounting concerns over the sovereign solvency of Ireland gripped markets. Indeed, Irish borrowing costs hit record highs as investors fretted over Ireland’s ability to impose crippling fiscal austerity measures. The associated souring in global growth sentiment saw global equity markets post modest declines, commodity prices fall and risk appetite dry up.
Rising risk aversion bolstered demand for the “safe-haven” of the USD at the expense of the EUR, AUD and NZD. Before long, NZD/USD had skidded from 0.7860 to around 0.7780. For today, the local data calendar is bare so expect the NZD to take direction from Asian equity markets.
Overall, we suspect the current backdrop of reduced risk appetite and equity market weakness will limit NZD/USD rallies to around 0.7870. Solid support is expected towards 0.7730.
Majors
A modest strengthening in the USD was the major theme in currency markets overnight. Over the week, the USD index has appreciated around 2%, reflecting renewed “safe-haven” demand and rising US bond yields.
With US (bond) markets shut for Veteran’s Day, it wasn’t surprising to see investors’ focus remain in Europe overnight. European sovereign credit spreads continued to push higher as investors fretted over a possible Irish sovereign default. Risk appetite, global equity markets, and the EUR were all pressured lower as a result.
There wasn’t any fresh news of note regarding the Irish crisis. However, comments from European Commission officials that the EU stands ready to support Ireland should it require assistance didn’t do much for confidence. The spread between Irish and German 10-year bonds blew out to a record high of 650bps.
By comparison, the spread to Greek bonds is currently around 920bps. European equity indices slipped 0.1-0.8%, while US stocks fell slightly more following a noticeably gloomy profit outlook from Cisco (stocks in which plummeted 17%). The VIX index (a proxy for risk aversion) jumped from 18.5% to above 19.5%. Reflecting the downbeat sentiment, investors sought out the relative “safe-haven” of currencies like the USD and JPY.
A report from a US think-tank suggesting the Fed may yet scale back the size of its quantitative easing program further bolstered USD sentiment. Given mounting fears over Europe’s debt crisis, it wasn’t surprising to see the EUR bear most of the brunt of the stronger USD; EUR/USD tumbled from 1.3800 to 1-month lows around 1.3650.
In contrast, GBP bucked the stronger USD trend as expectations of additional UK monetary easing continued to recede following yesterday’s surprisingly hawkish Bank of England quarterly inflation report.
GBP/USD spent the night shuffling sideways, while EUR/GBP slipped to a near 2-month low below 0.8480. With all eyes on Ireland, there was less attention on the G20 summit that kicked off overnight. There was nothing earth shattering for markets in any case. As expected, China and the US traded jibes on exchange rate policies, while the remaining members discussed ways to ease global imbalances and exchange rate tensions.
The draft communiqué suggests leaders will back "indicative guidelines" on correcting current account imbalances, but the idea of strict limits put forward by the US was ruled out. Tonight, markets will be on alert for the final release of the G20 communiqué, with the advance estimate of Q3 Eurozone GDP growth also likely to attract considerable attention.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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4 Comments
An interesting comment in the telegraph about Irish debt.
John Livesey
"just see the wave hit british banks etc that have invested heavily in Ireland if there is a collapse"
You could have said that a month ago, but there has been heavy selling of Irish debt in the past two weeks by Banks in France, Germany and the UK.
In fact, that is the real point. Long-only investors are starting to abandon the sinking ship.
One cannot be silent about the latest development on the world stage.
A week ago I wrote why the 3rd of November will make it into the history books. Although not being an expert in that field, I have great concern about the development.
On November 3, 2010, the Federal Open Market Committee (FOMC) decided to expand the Federal Reserve’s holdings of securities in the System Open Market Account (SOMA) to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate. In particular, the FOMC directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to purchase an additional $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. http://www.marketoracle.co.uk/Article24003.html
China’s provocation and the avoidable starting up of a massive currency war by the USA are only accelerating the collapse of “Western Economies” and others - a stupid move - leading into more serious wars.
(e.g. Larry Summers economy adviser of Obama says: Protectionism makes people poor.)
http://en.wikipedia.org/wiki/Federal_Open_Market_Committee
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8tiXZ1vO5jw
http://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_New_York
Who/ why are those people making such rather, unusual, strange and self- destructive moves – can someone help me out please ? Iain et al.
The G20 summit concluded this morning after failing to tackle growing concerns that currency wars between Washington and Beijing will undermine hard-won stability in the global economy.
Copy of a reader’s opinion (261 recommended) in the UK
These deals with countries such as China and India are deals between Wall street and the those countries and they only serve to enrich the barons of Wall street even further.
It's about outsourcing work to these countries in order to get cheap labour and not to create jobs here at home.
read up on the Nafta Highway in the US for a clue as to what is REALLY going on.
Wall street and the big corporations and banks which caused the recession.
Wall street runs the government no matter which party appears to be in power!!!! This whole attack on the poor by the wall street puppets in power is criminal.......this is only a pretend socialist country.
In real socialism we ARE all in it together but in this country like in the US the rich who are a small group at the top control 80% of the world wealth...
These greedy bastards are sucking the country and the world dry of it's resources and leaving a trail of utter poverty and environmental destruction and unless we can stop that we will see suffering on a scale that is unimaginable!
The obscene wealth at the top is supposed to trickle down but it doesn't do so. These rich pigs have caused the deficit and they are the ones who should be going without to balance the books...the books which they fiddled....not the poor and the unemployed and the sick!!!!!!
Wake up you idiots!!!!!
Full article: http://www.guardian.co.uk/business/2010/nov/12/g20-leaders-pledge-to-avoid-currency-war
Investors can protect themselves by buying into assets for which there is a demand, but with a limited supply. Property fits the bill perfectly.
I would place a bet that in five years time, we will be looking back wistfully at today's prices and wish we had bought more.
Even more satisfying will be the blubbering of those silly sods who were convinced that a property crash would be well and truly here by now and instead chose to rent instead of owning.
How many times have I seen this before?
People rent because it is cheaper in the short term.
But one day they will wake up and find property prices have shot away leaving them stranded as renters who don't even own the letterbox ... forever.
…and I reminds me soo much on our own little Wall street (see my comment 11:20am) of New Zealand.
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