Opinion: NZ$ slumps to 71 USc on global flight to safety

By Mike Jones Financial markets went into panic mode last night. As a result, after climbing above 0.7250 yesterday afternoon, the NZD/USD has crashed back to around 0.7100 this morning. There were surprises galore in yesterday’s employment report. It was exceptionally strong, no buts. The strength surprised all and sundry – the most bullish of forecasters, the market, and the RBNZ. Employment grew 1.0% in the quarter, and the unemployment rate fell to 6%, blowing market forecasts of 0.2% and 7.3% right out of the water. With the labour market now clearly responding to the NZ economic recovery, markets are now convinced the RBNZ will raise rates in June. The associated gains in NZ interest rates lit a rocket under the NZD yesterday. NZ-US 3-year swap spreads widened to 340bps, from 310bp the day before – pitching NZD/USD to almost 0.7280. Meantime, NZD/AUD climbed above 0.8050 for the first time since January this year. However, the positive NZD sentiment evaporated overnight. Fears the rot from Greece’s fiscal crisis could evolve into the credit crisis mark II sent markets into freefall. Confidence was shattered by the ECB’s failure to take action to shore up confidence in the Eurozone, and US Fed officials even warned of contagion effects from the European debt crisis spreading into the US. Incredibly, US equities tumbled more than 8% at one point last night before rebounding to be down around 3% currently. Our risk appetite index slumped to 38% – levels not seen since October last year. Soaring risk aversion prompted a stampede back into “safe-haven” currencies like the USD and the JPY, at the expense of “growth-sensitive” currencies like the NZD. NZD/JPY skidded from 68.00 to nearly 63.00 and NZD/USD slipped below 0.7100. While the NZD/USD is off its lows, we suspect the current backdrop of heightened risk aversion and sovereign default fears will limit NZD/USD rallies to 0.7180 in the short-term. Initial support is eyed towards 0.7070, and then 0.7000. Majors Last night’s currency movements were all about fear and panic. Worries about contagion from the European debt crisis saw risk aversion soar, sending most of the major currencies tumbling. The USD index rose to the highest level in 13-months. Fears the European sovereign debt crisis could cause a second leg of the global credit crisis spurred a loss of confidence that rippled across all asset markets last night. The rout in global stocks and ‘risk-sensitive’ currencies continued, as markets await some kind of circuit breaker to shore up confidence in the Eurozone. European stocks slumped 0.8-2.5%, and the EUR/USD plummeted to fresh 14-month lows below 1.2550. The EUR/USD has fallen more than 6% this week. Investors had pinned their hopes on the ECB to introduce measures to counter the malaise in European funding markets, such as purchasing European government bonds. However, in the event, the ECB said it hadn’t even considered such measures, which rattled investors’ confidence. Rates were left unchanged at 1%, as expected. Adding to the EUR’s woes, rumours did the rounds that not only was Italy on the verge of a sovereign ratings downgrade, but the Swiss National Bank had given up on intervening in EUR/CHF to prevent “excessive strength” in CHF. As a result, EUR/CHF tumbled from above 1.4300 to a record low of almost 1.4000. The fact Spain managed to successfully issue 5-year government bonds, albeit at higher yields than the last auction (3.6% vs. 2.8%), provided some brief respite for EUR. ECB President Trichet also said a Greek default is “out of the question”, although markets are understandably dubious. Fallout from the Greek crisis spread as far as the US. Indeed, US stocks were belted last night. The S&P500 is currently down around 3.5%, having fallen more than 8% at one point during the night. Speeches from Fed officials Bullard and Lacker both noted the risk to the US outlook from deteriorating conditions in Europe. Some relatively dismal April retail data (Chain store sales rose 0.5% vs. 1.7% expected) added to negative sentiment. The VIX index (a proxy measure for global risk aversion) spiked to 35.5% – the highest level since May 2009. Against a backdrop of tumbling global stocks and soaring risk aversion, investors stampeded back into “safe-haven” currencies last night. JPY crosses plunged across the board (USD/JPY slid over 5%) and the USD reached the highest level since April 2008. For today, expect ‘growth sensitive’ currencies like AUD, NZD and CAD to remain heavy. EUR bounces are seen as limited to 1.2700. *All of the research produced by the BNZ Capital team of economists is available here