by Raiko Shareef
NZ Dollar
The NZD/USD continues to swing a tight range around the 0.8700 level, with surprisingly little downside traction made in a negative risk environment.
The combination of an alleged shooting-down of a jetliner, an Israeli ground operation in Gaza, and the possibility of a bond default in China would normally see the NZD sold off significantly.
The VIX Index of volatility has surged from 11.5 to 14.8 overnight, hitting its highest level since April. In our modelling framework, based on 10 years of historical relationships, a spike in VIX of this magnitude should be enough to take 1.0 to 1.5 cents off NZD/USD.
This has not happened yet, but as this note goes to print, NZD/USD is making fresh lows for July, and looks ripe to test support at the 50-day moving average at 0.8650.
With the JPY benefitting from a safe-haven bid, NZD/JPY is sharply weaker, down 0.8% to 87.80. It has broken through supporting moving averages, and looks set to push further lower, both on a technical and fundamental basis.
In the day ahead, the focus will remain on developments on the geopolitical front. The first stop of support for NZD/USD is 0.8650, while initial resistance sits at 0.8700.
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Majors
Markets are in the risk-off mode, after news broke early this morning of a Malaysian Airlines jet, MH17, downed in Ukraine, with 285 people on board. The JPY is 0.4% stronger against the USD at 101.30, while other major currencies are little changed.
Investors have focussed on widespread reports that the plane was shot down, though who is responsible remains unclear. Ukrainian officials are blaming pro-Russian rebels, as the crash occurred in the contested eastern part of the country, close to the border with Russia. Rebel spokesmen have denied the accusations.
Accordingly, equities are sharply lower, with the S&P 500 down 1.2% and the Euro Stoxx 60 off by 1.4%. Gold received a safe haven fillip, up 1.4% to $1,318.
In the currency space, the reaction has been much more muted, with the JPY and the RUB amongst the biggest movers. The latter has shed 2.0%, though some of that can be attributed to the impact of fresh US and EU sanctions slapped on major Russian companies yesterday, pre-dating the airline crash.
The MH17 incident sharpens the attention of investors on bubbling risks elsewhere, too. Amid the sea of headlines around the crash this morning, news outlets are reporting that the anticipated ground invasion of Gaza by Israeli forces has begun. And yesterday, the Asian market was nervously noted the prospect of another Chinese bond market hiccup.
Huatong Road & Bridge Group could fail to repay the principal on a $64.5m note due on 23 July. This would be the first instance of a default on bond principal in China’s institutional bond market. Recall that in March, Chaori Solar missed a coupon payment on a corporate bond.
With geopolitical risk in sharp relief, macroeconomic data played second fiddle overnight. For what it’s worth, US housing data were disappointing, with June’s housing starts falling by 9.2% m/m and building permits down 4.2% m/m. Both were expected to register gains. On the other hand, the Philly Fed business survey surged higher, against expectations for a mild decline.
Today, developments on the geopolitical front will keep risk assets subdued. The US Michigan consumer confidence would usually rate a mention, but we rather think investors will have other things on their minds.
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