Euro action dominates curency markets. Increased risk appetite boosts "commodity" currencies

The NZD has started the week on the front foot.

Developments in European sovereign debt markets remain the focus for currency markets. As a result the NZD spent much of the overnight session trailing gyrations in the EUR. Ratings agency S&P downgraded Greece’s sovereign rating to “B”, sending the EUR spiralling lower. The NZD/USD was briefly dragged below 0.7900 in sympathy.

However “growth-sensitive” currencies like the NZD didn’t stay down for long as risk appetite and global commodity prices staged a recovery from last week’s rout. We noted yesterday that last week’s commodities declines looked more like a (healthy?) correction from overbought levels, rather than a shift in “fundamentals”. Overnight, oil prices rebounded 5.5% to US$103/barrel, silver and gold prices bounced and the CRB global commodity price index recovered around 2%.

Meantime, US stocks shrugged off a weak lead from across the Atlantic (the S&P500 is up around 0.5%), indicative of still buoyant risk appetite. Our risk appetite index (which has a scale of 0-100%) ticked up to 66.9% last night from 63.8% on Friday.

Against a backdrop of improving risk appetite and recovering commodity prices, the NZD/USD was soon climbing back towards 0.7950. And relative to the underperforming EUR, the NZD rose to a one month high of around 0.5540.

Looking ahead, it is a relatively unexciting weak for NZ data and events. So offshore developments should again dictate NZD direction this week. In particular keep an eye on this week’s slew of Chinese data (trade balance released today at 2pm NZT). A strong set of figures would act to further underpin commodity prices and hence the NZD and the AUD. USD sentiment will also be important. Key in this regard is whether last week’s EUR/USD sell-off was a flash in the pan or the beginnings of a deeper correction. Watch European sovereign debt developments.

All up, we suspect the NZD/USD is in for a choppy range-bound week. Near-term support is eyed towards 0.7740 with stiff headwinds expected on rallies towards last week’s 0.8120 high.

Majors

It’s been a relatively choppy night in currency markets with fluctuations in EUR sentiment generally dictating play. The USD index ended the night slightly firmer.

The EUR/USD spent the first part of the night recovering from Friday night’s steep losses. A bunch of weekend press reports confirmed that Friday’s EU meeting did not discuss the possibility of Greece leaving the Eurozone, helping soothe sovereign default fears. German exports figures for March surged above expectations (7.3%m/m vs. 1.1% expected) further bolstering EUR sentiment. After opening the week around 1.4330, the EUR/USD ground up to nearly 1.4450, dragging most of the majors higher.

However the gains didn’t last for long. Later in the night ratings agency S&P downgraded Greece’s sovereign rating two notches to B, taking a heavy toll on European equities and the EUR. The DAX fell 1.1%, the FTSE eased 0.6% and the EUR/USD skidded 1½ cents lower to an overnight low of around 1.4250.

Still Wall St stocks managed to post modest gains amid increased M&A activity. The S&P500 rose 0.5%. Commodity prices also rebounded from last week’s lows as bargain hunters emerged. Oil prices jumped 5.5%, silver prices bounced 5.4% and the broader CRB commodity price index increased nearly 2%. Overall investors’ risk appetite remained underpinned at high levels, ensuring the dip in “risk sensitive” currencies like CAD, NZD and AUD was relatively short lived.

Looking ahead it is still not clear as to whether last week’s sharp EUR/USD sell-off was simply a bout of profit-taking driven by heavily long speculative positions or the beginnings of a deeper correction. The price action over the past 24 hours would tend to tip the scales in favour of the former. In the near term we look for 1.4220 support to hold in the EUR/USD.

Fixed Interest Markets

After initially selling off US bond markets rallied through the latter stages of the night as S&P’s Greek rating downgrade spurred “safe-haven” buying. Two and ten year US Treasury yields ended the night 1-2bps lower at 0.54% and 3.14% respectively.

The reaction in Greek debt markets was actually fairly modest, suggesting a ratings downgrade was partly priced in. A mild increase in Greek 10-year yields saw the spread to the German equivalent widen around 30bps to 1260bps. Contagion worries prompted a similar 15-20bps widening in Portuguese and Spanish sovereign bond spreads.

Turning to the domestic market, there was very little action in local swap and bond markets yesterday. News that the BNZ Confidence Survey (as complied and published by Tony Alexander) built on the nice recovery it posted in April failed to ruffle markets in any form. With little direction from offshore markets we expect local swap rates to open around unchanged today.

Mike Jones is part of the BNZ research team. 

All its research is available here.