The terror attacks in Brussels dominated market trading overnight. There was a rush to safe haven assets (excluding the EUR) as the news came out, but the move has since faded in most assets.The bellwhether of risk, the VIX index, jumped from 13.8 to 14.6 on the US open but has since dropped back to 13.8, at its low for the year.
As the news on the attacks came out, European currencies weakened, the Yen strengthened, equities fell and bond yields dipped. The GBP is the weakest currency, down 1.2% to around 1.42, as investors thought the risk of Britain leaving the EU increased – those in favour of Brexit argue that an open migration policy leaves Britain vulnerable to attack.
EUR/USD is down by 0.3% at 1.1210, losing 60 pips on the bombing news, but recovering some of its losses after some better economic confidence indicators. The Markit PMI’s showed manufacturing in line with expectations and services stronger, with both in expansion territory. Furthermore, Germany’s IFO business climate indicator improved by more than expected.
USD/JPY fell by 50pips to a low of 111.38 on the Brussels news, but the move has since been fully retraced and it now sits at 112.40, above the pre-attacks level.
The AUD is the strongest currency over the past day and has traded almost a full cent range of circa 0.7550-7640. The currency was bid as RBA Governor Stevens delivered an upbeat speech, arguing that the economy is “adjusting quite well” to lower commodity prices and has more monetary and fiscal policy scope to respond to a global downturn than most countries.
On the AUD, in the Q&A he noted that there was some risk the currency “may be getting ahead of itself”. After a temporary dip on the Brussels news, the AUD rebounded, and currently trades at 0.7615.
The NZD has significantly underperformed the AUD and trades down a bit at 0.6740, having traded in a tight 50 pip range over the past day.
On the cross, NZD/AUD is down 0.8% at 0.8850, and is approaching heavy technical support around the 0.88 level.
With Australian commodity prices continuing to outperform NZ commodities and convergence of 2-year swap rates, our fair value model estimate is down to 0.8530 (just over 1.17 on an AUD/NZD basis), so the move lower in NZD/AUD has strong economic fundamental support and is expected to continue over coming weeks/months.
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