Markets waiting on German parliament vote on new support funding

By Mike Burrrowes

NZD

NZD/USD was the worst performing currency over the past 24 hours as risk sentiment and commodity prices have fallen. NZD/USD briefly reached 0.7900 during the evening, but has fallen to 0.7780 early this morning. In the near-term, expect the NZD to continue trading in lock-step with the various twists and turns in the European debt crisis.

The NZD trade-weighted index lost ground overnight, falling 0.9% to 69.10. It was one-way traffic in NZD/EUR, falling steadily to 0.5730 throughout the evening. NZD/GBP dropped from 0.5040 to 0.4990 early this morning. The decline in risk sentiment saw NZD/JPY fall over 1% to 59.50 overnight.

NZD/AUD has retreated to the lower end of its recent 0.7900 to 0.8050 range, as we countdown to tomorrow afternoon’s NBBO survey. The NZ-AU 3-year interest rate differential has stabilised nearer -100bps this week, rather than the -85bps of earlier this month. The last time the interest rate differential was at this level the cross was trading around 0.7800. As we open, support is initially pegged at the 0.7900 level – a breach would see us set our sights on returning to the 0.7800 level.

While the risks are skewed to a fall in NZD/AUD in the near-term, we still believe rising NZ interest rates and stronger domestic growth will see the cross trading beyond 0.8500 by September next year.

Looking to the day ahead, with no local data due for release expect the NZD to take its cues from offshore. Keep an eye out for any comments from RBNZ Governor Bollard speaking on Radio NZ this morning.

Initial support on NZD/USD is eyed at 0.7750 and resistance at 0.7840.

Majors

The major currencies fell against the USD overnight as investors await further developments in the European debt crisis. The mild risk-off mood has seen the USD and JPY supported by “safe haven” flows, while the risk sensitive NZD and AUD have underperformed.

Equity markets slipped overnight\ with the S&P500 and Euro Stoxx 50 index falling 1.2% and 0.8% respectively. The fall in equities saw the VIX index (proxy for risk aversion) rise to 39.9 from 37.7. Commodity markets have continued to lead the declines across asset markets, with gold and oil prices both down over 2.8% overnight. The CRB index (broad index of global commodity prices) shed 2.4%.

EUR/USD rallied from around 1.3550 to 1.3680 during the evening, but has fully reversed these gains in the early hours of this morning. Sentiment towards the EUR was initially boosted by cautious optimism Greece will receive the next aid payment, thus avoiding a near-term default on its debt. Indeed, the Troika return to Greece on Thursday to continue negotiations.  Further supporting the EUR was higher-than-expected German CPI for September (0.1% vs. -0.1%m/m expected). This will take some pressure off the ECB to cut rates more aggressively.

The EUR gains were reversed throughout the early morning as the positive risk sentiment waned. Sentiment was dented by news the French and Italian authorities will keep the short-selling ban on financial shares in place. Further dampening sentiment was a weak German 5-year government bond auction, with bids not even matching the volume offered. EUR/USD is currently trading around 1.3570.

While EUR/USD has been better supported in recent days, if European policymakers do not acknowledge market expectations of further steps to stem the debt crisis, the relief rally will fade very quickly. This could see EUR/USD retest the recent low of 1.3360.

GBP/USD largely tracked the moves in the EUR overnight. During the early evening GBP/USD reached a high of 1.5670, but has fallen to 1.5600 currently. Beyond the intra-day moves in the EUR, the market remains very cautious of the GBP as there is a growing expectation the Bank of England will announce a further round of quantitative easing.

Retiring Federal Reserve member Hoenig fired some warning shots overnight, noting the ultra-loose US monetary policy will create problems for the US economy. He also had a go at US policy makers, noting US monetary policy was a band aid for a failure to agree to lower the United States' long-term debt.

Looking to the day ahead, expect the trials and tribulations of the European debt crisis to keep trading in FX markets volatile. In particular, the German parliament is due to vote on widening the scope of the EFSF. The passing of this bill may pave the way for European political leaders to begin discussing further measures to stem the crisis.

On the data front, we have German employment data, Eurozone consumer confidence and US pending home sales. The Fed’s Plosser is also due to speak.  

See our interactive swap rates charts here and bond rate charts here.

Mike Burowes is part of the BNZ research team. 

All its research is available here.