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Subdued trading in FX markets, enlivened mostly by Euro rumours; US Fed downbeat on economy

Currencies
Subdued trading in FX markets, enlivened mostly by Euro rumours; US Fed downbeat on economy

By Mike Burrrowes

NZD

The NZD tracked gyrations in global risk appetite overnight. Sentiment remained in good heart during the evening as hopes rose EU leaders would announce a bold rescue plan this weekend. Risk sentiment faded late this morning following some negative comments out of Europe and a downbeat assessment of US growth by the Federal Reserve.

NZD/USD briefly broke through the 0.8000 level during the evening, but has skidded to 0.7920 this morning. Expect trading on the NZD to remain fickle in the lead-up to this weekend’s EU Summit.

The NZD was very stable against the EUR, oscillating around 0.5770. A stronger GBP overnight (see below) saw NZD/GBP fall to 0.5020, from 0.5060.

NZD/AUD remains off the radar for most investors. The cross spent the evening trading below 0.7750. The spread between RBNZ and RBA policy expectations over the next 12 months has narrowed to 145bps, from over 200bps in mid-September. We favour a move higher in this differential and the NZD/AUD cross over the next 3 months.  

Looking to the day ahead, there is no local data due for release. Across the Tasman, we have a speech from the RBA’s Edey and the NAB quarterly business survey. On the day, NZD/USD support is seen at 0.7860 and resistance at 0.7990.

Majors

Trading in FX markets overnight was relatively subdued ahead of this weekend’s much hyped EU Summit. A fall in risk sentiment late this morning has helped the USD index post modest gains against most of the major currencies over the past 24 hours.

The modest gain in the USD was led by equity markets. The S&P500 index shed 0.8%, while the Euro Stoxx 50 index gained 1%. Our risk appetite (scale 0 – 100%) index fell to 31.1%, from 32.2%. Commodity price moves were mixed, with WTI oil gaining 0.3% but the CRB index (broad index of global commodity prices) fell 0.2%.

EUR/USD reached a high above 1.3850 overnight, but has fallen back to 1.3770 early this morning. Sentiment towards the EUR was again driven by whether or not the EU will announce a rescue plan at the EU Summit this weekend. An article yesterday in the Guardian helped to bolster hopes a rescue plan will be announced, despite the article being dismissed by EU officials.

These hopes were tempered early this morning after several negative comments hit the market. A Moody’s official suggested there would be a 60% haircut for Greek bondholders. German Chancellor Merkel continues to manage market expectation, noting there is “no magic wand” to solve the debt crisis.  

The GBP was the best performing currency over the past 24 hours, gaining 0.3% to around 1.5760. The strength in the GBP was despite the Bank of England minutes striking a dovish tone. The minutes noted inflation would undershoot the BoE 2% target and growth would weaken further without additional monetary stimulus.

The US data outturns were mixed overnight. The Fed’s beige book knocked risk sentiment late this morning, describing growth in most regions as modest or slight. US CPI for September was inline with expectations at 0.3%m/m, while housing starts for September surprised at 15%m/m (vs. 3% expected).

Looking to the day ahead, in Europe we have the release of UK retail sales and Eurozone consumer confidence. In the US, the focus is likely to be on the Philadelphia Federal manufacturing index and speeches from Fed members Bullard, Lockhart and Pianalto. These events may briefly pull the market focus away from the Eurozone debt crisis.

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Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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