By Mike Jones
At around 0.7430, the NZD/USD is little changed relative to this time yesterday. However, this masks a decent amount of intra-day volatility.
Yesterday afternoon the NZD/USD enjoyed a brief spurt higher on the coat-tails of the EUR. Chinese vice-premier Wang helped soothe worries about the European debt crisis, promising increased Chinese support for troubled European sovereigns “if necessary”.
Short covering by short-term speculative accounts propelled EUR/USD half a cent higher, dragging NZD/USD from 0.7400 to above 0.7450.
However, the gains in EUR and NZD proved to be fleeting. European sovereign solvency concerns returned to the fore overnight, prompting renewed demand for “safe-haven” currencies like the USD and JPY. Ratings agency Moody’s put Portugal on watch for a sovereign downgrade and UK public borrowing figures for November were simply terrible. With the EUR and GBP heading swiftly southwards again, the NZD/USD soon skidded back to around 0.7420.
Nevertheless, “growth-sensitive” currencies like the NZD and AUD outperformed, reflecting further modest gains in equity and commodity prices overnight. As a result, NZD/GBP climbed from around 0.4770 to above 0.4800 and NZD/EUR lifted half a cent to around 0.5780.
This morning’s September quarter balance of payments data should keep local markets occupied in the lead up to tomorrow’s all important Q3 GDP figures. We are looking for a small increase in the annual deficit to 3.1% of GDP, from 3.0% in Q2 (market expectations 3.4% GDP). Certainly, the figures will be flattered by an inflow of foreign funds from the Canterbury earthquake reinsurance.
Excluding the earthquake impact the deficit would look a more worrisome 4.0% of GDP. Still, if we are right, some support for the NZD/USD will likely be in the offing. We suspect resistance around 0.7480 will cap rallies on the day. Near-term support is eyed on dips towards 0.7330.
Majors
It’s been a fairly volatile 24 hours in currency markets, not helped by holiday-thinned markets. After diving yesterday afternoon, the USD spent most of the night grinding choppily higher. The USD started the night on the back foot after a short-covering rally in the EUR/USD yesterday dragged most of the major currencies higher.
European sovereign debt concerns were partially soothed by comments from Chinese Vice Premier Wang that China “…has taken concrete actions to help counter the sovereign debt crisis”. What’s more, China promised further support (mostly likely through bond purchases) for Europe “if necessary”. From 1.3120, EUR/USD jumped above 1.3180 as speculative investors covered short positions. GBP/USD climbed to 1.5540 and USD/JPY slipped below 83.60 on the back of the firmer EUR.
Broader risk appetite also received a boost from the Chinese comments. European equity indices rose 0.9-2.1%, with increased M&A activity also bolstering equity market sentiment. The US S&P 500 index rose around 0.6% and the Dow Jones index posted a 0.4% gain. However, it wasn’t long before EUR strength began to fade.
The Chinese Commerce minister said “we are very concerned about whether the European debt crisis can be controlled.” Ratings agency Moody’s also put Portugal’s A1 sovereign rating on review for a possible downgrade, piquing still elevated contagion concerns. Portuguese sovereign bond spreads tracked modestly higher and the EUR/USD skidded back to around 1.3120, dragging most of the majors off their overnight highs in its wake.
Once again, the GBP took out the title of weakest performing currency, this time as a blow-out in the UK public deficit raised concerns about the effectiveness of the government’s fiscal consolidation efforts. The November deficit (excluding interventions) was £23.3b (£17b expected). That compares to £17.3b in November 2009, and is the largest monthly deficit for this month on record. GBP/USD was knocked from 1.5560 to around 1.5460 as a result.
Looking ahead, tonight’s ECB 3-month fixed rate tender will be in the spotlight to gauge Euro-zone bank funding pressures. Bad news here could provide the catalyst for EUR/USD to test key support at 1.2965.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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