NZ$ meanders as markets focus on French credit rating worries, "intolerable" Portuguese bank risk

By Mike Jones

The NZD was largely sidelined overnight, as investors’ focus remained firmly on developments in European debt markets. The NZD/USD has spent most of the past 24 hours trading choppily in a 0.7400-0.7470 range.

Risk aversion continued to dictate movements in most asset markets overnight. A steady stream of negative news out of Europe saw equity markets record modest declines, commodity prices fall and credit spreads push higher. Our risk appetite index (which has a scale of 0-100%) slipped 3% to 56.4%. As recently as 19 November the index was sitting above 70%.

Not only did rumours do the rounds that France may suffer a ratings outlook downgrade, but fears over the fiscal health of Portugal were piqued by a stern warning about fiscal consolidation from the nation’s central bank.

Against a backdrop of soft equity markets and worsening risk appetite, investors rushed back into the relative “safe-haven” of currencies like the USD and JPY.

The EUR bore most of the brunt of the stronger USD, with EUR/USD slipping a further cent to around 1.3000. Still, a near 1% fall in NZD/JPY ensured rallies in NZD/USD were limited to around 0.7460 overnight.

Looking ahead, we suspect the European sovereign debt crisis will continue to occupy most of traders’ attention in the near-term. But there is a fair bit of other event risk to watch out for today as well. 

This afternoon’s ANZ commodity price index for November should consolidate recent strong gains. However, we’ll be watching tomorrow morning’s Fonterra auction results just to check milk prices haven’t slipped in a noticeable way.

Elsewhere, Australian GDP (due at 1:30pm NZT), the Chinese PMI (2pm NZT), and tonight’s US and European PMI updates will also all hold relevance given the renewed global jitters.

In the short-term, solid support on NZD/USD is eyed towards 0.7400, with initial resistance at 0.7520.

Majors

Familiar themes prevailed in currency markets overnight. Deepening worries about the fiscal health of the Eurozone spurred risk aversion, bolstering demand for “safe-haven” currencies like the CHF, JPY and USD. The USD index has climbed nearly 1% this week, to two month highs.

Investors looking for excuses to keep selling the EUR were almost spoiled for choice.

Market chatter was abuzz with rumours not only that S&P was on the verge of downgrading France’s ratings outlook, but also several large German Banks were having liquidity difficulties. Comments from the Bank of Portugal that banks could face an “intolerable risk” if the country failed to consolidate its public finances certainly didn’t do anything for confidence either.

The clear divergence in euro-area economic fortunes was highlighted by last night’s data. While German unemployment held steady at 18-year lows (of 7.5%), Italian unemployment jumped from 8.3% to 8.6% and Greek retail sales plunged a whopping 9.9%y/y.

Mounting Eurozone debt concerns saw sovereign credit spreads push higher (in the case of Spain and Ireland to record highs), equity markets continue to suffer, and risk aversion spike higher. Global equity indices recorded losses of 0.2-1.1% and the VIX index (a proxy for risk aversion) climb from 21.5% to almost 23.5%.

Assets regarded as a “safe-haven” remained in hot demand. Gold prices jumped nearly 1.5% to US$1390/ounce, US Treasury yields fell 5-8bps across the curve, and currencies like the JPY, CHF and USD outperformed. Indeed, USD/JPY tumbled from 84.30 to around 83.60. Not surprisingly, the EUR led the declines amongst the majors, skidding from 1.3150 to two month lows below 1.3000.

However, later in the night, “risk-sensitive” currencies bounced off their lows after an encouraging batch of US economic data saw risk aversion ease somewhat.

US consumer confidence rose to 54.1 in November (53.0 expected), its highest in five months and the Chicago PMI index increased from 60.6 to 62.5, defying analyst expectations for a fall.

It’s worth noting that, despite all the negativity surrounding Europe, the CAD actually took the prize for the weakest performing currency overnight. Canadian GDP for September registered a surprise 0.1% fall (+0.1% expected), propelling USD/CAD from 1.0200 to around 1.0280.

* Mike Jones is part of the BNZ research team. 

All its research is available here.