Rush for safe havens as worries mount about Euro debt crisis

NZD

The NZD was the weakest performer over the past 24-hours, falling around 2.70% relative to a broadly stronger USD. It traded around 0.8400 this morning.

The USD strengthened due to “safe haven” appeal, as risk appetite plunged. The strengthening USD also appeared to reflect the accumulating frustration and action by central banks globally, against the previous broad weakness in the USD. Our risk appetite indicator (scale 0-100%) fell from 51% to 41%, the same level that it bottomed at during the March Japanese crisis.

The NZD started the evening trading around 0.8500, coming under increasing pressure overnight, falling to below 0.8400 this morning. It last traded here in mid July.

Trading in the NZD/AUD has been choppy over the past 24-hours. Early in the day, the cross was supported by the solid NZ employment report, but later came under pressure after comments from Finance Minister English stating that “we would much prefer the dollar to be lower”. The cross traded as high as 0.8060 early this morning before returning to trade around 0.8000.

The NZD showed some volatility relative to the EUR and GBP overnight, but lost ground versus both. The NZD/EUR declined to 0.5940 this morning and the NZD/GBP to 0.5160.

In the day ahead there are no NZ data releases. The dominant driver of the NZD remains risk appetite, which should remain under pressure in the day ahead.

Majors

As risk appetite has collapsed the CHF has been the only currency to outperform the USD. The JPY failed to act in its usual “safe haven” capacity given BoJ intervention to weaken the currency.

Markets have gone into a tail-spin. Markets fret that the ECB is impotent to prevent the crisis spreading to larger states, Italy and Spain, despite President Trichet’s announcement of further bond buying. The market also is questioning US medium-term growth prospects as US 10-year yields have dropped as low as 2.45%.

Equities indices have declined 3 to 5% across the board. The CRB global commodity index fell 2.80% and the WTI oil price almost 6%. The VIX index (a proxy for risk aversion) spiked to 29, a level it last touched in March this year.

Against this backdrop, the USD acted in its “safe haven” capacity, with the USD index climbing from 74.00 to above 75.00 this morning. The USD has also seen upward pressure, due to accumulating efforts by central banks globally to unilaterally stem their currencies’ appreciation relative to the weak USD.

The most recent in this regard was the Bank of Japan, which intervened yesterday to curtail JPY appreciation. The JPY surged from 77.00 to 78.50 on the action. It then climbed as high as 80.00 before subsiding to 79.00 this morning. This still leaves it in line with the level it was at when the G7 coordinated intervention back in March, after the Japanese earthquake.

The effect of the Swiss National Bank’s efforts to weaken its currency appears to have been short-lived. The currency maintains its “safe haven” appeal in the current turmoil. The USD/CHF declined from 0.7780 to 0.7680 this morning.

The ECB and Bank of England both left rates on hold, as expected. Trichet commented that they would continue to ‘monitor closely’ all developments, whilst also making several references to inflation risks. He commented that a strong dollar is good for the US and the rest of the world. The EUR declined from 1.4350 to 1.4150.

The BoE left rates at 0.5% as expected, and maintained asset purchases at £200bn. The GBP declined against the broadly stronger USD falling from 1.6450 to 1.6300.

The AUD and NZD were amongst the weakest performers over the past 24 hours given plunges in risk appetite and commodities. The AUD declined to 1.0500 this morning, its lowest level since the end of June. Today’s RBA statement of monetary policy should provide more evidence of its current thinking.

Tonight’s US non-farm payrolls will be the key release tonight. German industrial production data will also be important.

Fixed Interest Markets

It was a day of consolidation in NZ interest rate markets.

The DMO auction saw mixed demand, with 1x bid-to-cover ratio for 17s but 5.6x bid to cover ratio for 23s. Successful bids for 23s were at 4.90%. The bond curve flattened from the long-end, as the yield on 13s closed up 1bps on the day at 3.25%, while the yield on 23s closed down 4bps at 4.85%.

Swap yields pushed a little higher on the day with some curve steepening as 10-year yields rose 4bps to 5.08% and 2-year yields rose 2bps to 3.56%. The opposite moves in bond and swap yields has seen 10-year spreads (EFP) widen to 34bps, the highest level since January 2010.

Overnight, in the backdrop of severe risk aversion US 10-year bonds rallied hard, with yields falling from 2.65% to 2.45%, almost to their lows from October last year. Similarly German 10-year yields fell from 2.45% to 2.30%.

ECB President Trichet said the ECB had resumed bond purchases and will offer more liquidity to banks to try to prevent the region’s crisis spreading to Italy and Spain. However, the market appeared unconvinced, with CDS spreads for Italy and Spain rising to new highs at 387 and 430bps respectively. Though to provide perspective, they are still some way below Greece’s at 1737bps.

There are no NZ data releases today, but NZ yields should come under downward pressure today, given sharp downward moves seen off-shore overnight.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.