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Investor risk appetite plunges in the wake of FOMC announcement; NZ$ sold off heavily; Credit spreads expand

Posted in Currencies

By Kymberly Martin

NZD

The NZD was amongst the weakest performers over the past 24-hours as the market continues to absorb the implications of the recent US Fed announcement. The NZD/USD trades at 0.7740 currently.

The NZD/USD showed a knee-jerk decline in response to the release of NZ Q1 GDP yesterday. At 0.3%q/q, Q1 GDP was below consensus expectations (0.5%). Still, this was a decent result following Q4’s heady 1.5% outcome.

The annual rate of growth sits at 2.4%. Subsequently the NZD/USD found its feet but came under heavy selling pressure overnight, as broad risk appetite fell away.

The NZD/USD broke through key support at the 0.7800 level to sit close to its intra-night lows currently. At 0.7740, the NZD/USD is now at its lowest level since June 2012.

Domestic fundamental (growth, interest rates and commodities) continue to underpin the NZD, over the medium-term, especially relative to the AUD.

However, reduced risk appetite, and greater volatility reduce the attraction of the ‘carry’ trade of which the NZD has been a key beneficiary. For today, resistance is seen at the 0.7800 level.

Near-term support may be found around 0.7670, with deeper support not seen until the 0.7500-0.7550 window.

The NZD was also weaker on all the key crosses overnight. The NZD/EUR is gallantly attempting to find support at the 0.5850 level that marked its lows earlier in the month.

The NZD/GBP is hovering at the crucial 0.5000 level, its lowest level since last September.

The NZD/AUD weakened from above 0.8500 to around 0.8420 this morning. We would continue to see dips in this cross as opportunities to position for further strength over the medium-term.

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Majors

Broad USD strength was again the key story overnight, as risk appetite plunged in the wake of yesterday’s FOMC announcement.

Overnight, there was little attention given to data delivery as the ‘Fed’ remained the dominant driver of markets.

As our risk appetite index (scale 0-100%) fell to 55%, the Euro Stoxx 50 fell 3.6% and credit spreads pushed wider.

Peripheral European spreads to German bonds widened as a further indication of reduced risk appetite e.g. Italian-German 10-year bonds spreads widened around 18bps to 288bps. US 10-year yields moved above 1.40%.

The USD index continued to climb higher from around 81.40 early last evening to above 82.10 early this morning, before finding a level around 81.90 currently.

Still the USD index remains well below its mid-May highs (above 84.00). The further break-out of US Treasury yields overnight suggests further additional strength maybe in the offing.

Meanwhile the EUR/USD traded a fairly steady downward path, ignoring the release of slightly better-than-expected Eurozone PMI data.

The composite PMI for June rose to 48.9 from 47.7 previously, suggesting less aggressive contraction. Having touched as low as 1.3160 early this morning the EUR/USD now trades around 1.3210.

After its dramatic fall yesterday, the GBP actually held up well versus the strong USD overnight. It received support from UK data showing May retail sales at 2.1%m/m (0.8% expected). The GBP/USD has traded a fairly steady path around the 1.5480 level.

The USD/JPY moved up from 97.00 to around 98.30 last evening, before flattening overnight, and returning to trade at 97.50 this morning.

The AUD was a key underperformer over the past 24-hours along with the NZD, SEK and a dramatic fall in the NOK. The AUD had steadied itself yesterday morning, then faced a disappointing decline in the China HSBC flash PMI (48.3 vs. 49.1 expected).

The AUD/USD then continued its path lower overnight as broad risk appetite was battered, to trade around 0.9170 currently.

The AUD/USD is now at its lowest level since September 2010. The prospect of less Fed stimulus and greater volatility ahead has reduced the attraction of the AUD ‘carry’ trade, while the fundamentals for the AU economy have also soured.

Today, markets will likely show further volatility into the weekend. This afternoon the Bank of Japan Governor Kuroda is scheduled to speak. Aside from that there are few data points of significance.

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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