By Mike Jones
From hero to zero. After strengthening for most of the week, the NZD/USD has taken out the title of weakest performing currency over the past 24 hours. It was a night of mixed fortunes in currency markets.
Indeed, the NZD/USD spent the first part of the session drifting higher. July UK retail sales outpaced even the most optimistic forecast (+1.1% vs. 0.3% expected), the Bundesbank revealed a hefty upwards revision to its German growth forecasts and equity markets started the night on the front foot. Against this more optimistic global backdrop, investors’ risk appetite was restored and NZD/USD climbed to almost 0.7150. However, it wasn’t long before global growth fears returned.
A surprisingly large jump in US jobless claims and a terrible reading of the Philadelphia Fed index sent investors diving for cover. Global equity markets plunged 1.2-2.1%, the CRB index (a broad index of commodity prices) dipped around 0.6%, and our risk appetite index (which has a scale of 0-100%) fell from 52.8% to 49.0%.
Against a backdrop of rising risk aversion and renewed worries about the global outlook, “growth-sensitive” currencies like the NZD/USD and AUD/USD suffered as investors sought out the relative “safe-haven” of the JPY, CHF and even the USD. From above 61.40, NZD/JPY skidded back to 60.40 and NZD/USD eventually settled back below 0.7100.
Looking ahead, local credit card spending and migration data for July will be worth keeping an eye on today.
Meanwhile, Australian markets will be focused on a speech from RBA Deputy Governor Battellino, ahead of Saturday’s Federal election. Overall, we wouldn’t be surprised to see further downside in NZD/USD today should Asian equity markets continue the weak theme from overnight. As we noted at the start of the week, the key support level to watch on NZD/USD is 0.7050. A daily close below this level would suggest a deeper pull-back towards 0.6850-0.6900 is on the cards.
Majors
It has been a fairly volatile 24 hours in currency markets. The net result is a firmer USD, despite a clear escalation in fears over the strength of the US economy. The first part of the night was all about improving risk appetite and a softer USD. A fifth straight day of gains in Asian equity markets kept risk aversion at bay, encouraging investors to trim positions in “safe-haven” currencies. Indian and Chinese stock indices yesterday reached fresh 30-month and 3-month highs respectively. The Bundesbank raised its 2010 German GDP growth forecast to 3% from 2%, bolstering EUR sentiment. From below 1.2800, EUR/USD climbed to nearly 1.2900.
Upbeat UK retail sales data reinforced the more buoyant mood. Contrary to expectations for a 0.3% gain, sales surged 1.1%m/m in July. Confirmation of economic momentum in the UK allowed GBP to continue its strong run; GBP/USD gapped from 1.5500 to almost 1.5660 and EUR/GBP slipped to 0.8220.
However, over the second part of the night, financial markets were sent into a tailspin. Concerns about a US double-dip recession gripped US markets once again following a downright awful batch of US economic data. Not only did weekly US jobless claims scale a nine-month high of 500,000 (478,000 expected), but the August Philadelphia Fed index (an indicator of business activity) fell to -7.7, the lowest since July 2009 and well below expectations for +7.0.
Equities and US bond yields slumped in the wake of the data. In fact, 2-year Treasury yields hit a fresh all-time low of 0.47%. Signs of flagging US growth momentum initially prompted traders to sell the USD – USD/JPY briefly flirted with 15-year lows below 85.00. However, steep declines in equity markets and rising risk aversion eventually saw investors flock back into “safe-haven” currencies.
Global equity markets recorded declines of 1.2-2.1% and the VIX index (a proxy for risk aversion based on the volatility of the S&P500) jumped from 24.5% to above 26.5%. As a result, JPY, CHF and to a lesser extent the USD were the night’s strongest performing currencies.
In contrast, “growth-sensitive” currencies like AUD, CAD and NZD were shunned. A 1.4% fall in oil prices (to US$74/barrel) further dented demand for the ‘commodity currencies’. For today, the current backdrop of equity market weakness and rising risk aversion should continue to support “safe-haven” currencies like the USD and JPY. Strong support on the USD index is eyed towards 82.00.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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