NZ$ hit by rising risk aversion back below US$0.83; interest rate markets scale back expected OCR increase

NZ$ hit by rising risk aversion back below US$0.83; interest rate markets scale back expected OCR increase

By Kymberly Martin

NZD
The NZD was the worst performing currency over the past 24 hours, buffeted by rising risk aversion and falling commodity prices. NZD/USD opened the week around 0.8400, but has dropped to 0.8250 currently. The spike in risk aversion was driven by the downgrade to the US’s AAA credit rating and further concerns around the European debt crisis (see below).

The NZD has underperformed across the board, with the trade-weighted index (TWI) falling 1.4% to 71.50 currently. Since the beginning of the month, NZD/USD and the TWI are down 6.8% and 4.9% respectively. NZD/EUR trading was volatile overnight, recovering from 0.5760 to 0.5850 during the evening. Early this morning NZD/EUR fell back to 0.5800. NZD/GBP spent the evening hovering above the 0.5020 level. The ongoing strength in the JPY saw NZD/JPY plummet from 65.50 to 64.20 currently.

NZD/AUD spent most of the evening trading around the 0.8000 level. Relative interest rate differentials continue to support the cross, with the NZ-AU 3-year interest rate differential becoming less negative at -71bps from -80bps on Friday.  

The global jitters saw expectations of rate hikes from the RBNZ scaled back further yesterday. The OIS market is now pricing a 24% chance of a 25bp hike at the September meeting, from 40% on Friday. Over the next 12 months the OIS market now expects 38bps of hikes from the RBNZ, from 57bps on Friday.

The premise for the removal of the 50bp ‘insurance cut’ in September is being seriously tested. Namely, that ‘provided current global financial risks recede…’. Clearly, the risk of the RBNZ waiting for longer has increased markedly over the past week. The risks are mounting that we will have to push out our September rate hike call to later in the year.

Looking to the day ahead, the only NZ data is electronic card spending. Given the global ructions offshore expect this to gain little attention. The market will look to the release of Chinese retail sales, industrial production and CPI for July for hints growth is slowing faster than expected.   

Majors

The USD rallied overnight against nearly all the major currencies, with the exception of the “safe haven” CHF and JPY. The USD responded in its role as a “safe haven” currency, as opposed to weakening on concerns around US growth and the potential for QE3 from the Fed.

The downgrade of the US’s AAA credit rating over the weekend sent global equity markets into a tail-spin overnight. The S&P500 and Euro Stoxx 50 index plummeted 5.0% and 3.7% respectively. The VIX index (a proxy for risk aversion) spiked above 42, its highest level since May 2010. The rout was also felt in commodity markets, with the CRB (broad index of global commodity prices) shedding 2%. The global uncertainty is helping to spur gold to a fresh record high above USD1700 per ounce.

Adding to the global concerns, the ECB began purchasing the government debt of Spanish and Italian. However, the ECB action appeared to do little to dampen investors’ worries the European debt crisis is moving into core countries. EUR/USD has shed 1 ½ cents since yesterday morning to currently be trading around 1.4200. EUR/CHF continued its run overnight, making a fresh record low just above 1.0600.

The rise in risk aversion sent the “safe haven” CHF and JPY soaring overnight. USD/CHF fell to a record low below 0.7500 despite the recent easing in monetary policy by the Swiss National Bank. USD/JPY traded to a low around 77.50, after starting Monday morning above 78.00. The recent actions by the Swiss National Bank (cutting interest rate to zero) and the Bank of Japan (currency intervention) to stem the rise in their currencies is having little impact. Should these moves continue expect further comments from the G7 about coordinated intervention to stabilise market sentiment.

The NZD and AUD were the worst performing currencies over the past 24 hours, succumbing to rising risk aversion and falling commodity prices. AUD/USD started Monday morning just below 1.0400, but has plunged to 1.0250 currently. The global jitters have seen interest rate markets ramp-up expectations of rate cuts from the RBA. The OIS market is pricing 130bps of cuts over the next 12 months and 38bps of cuts at the next RBA meeting.

Investors will now turn their attention to the Federal Reserve policy meeting tomorrow morning at 6.15am NZT. We expect the Fed to signal a weaker outlook for US growth and inflation. Given the weaker outlook, we would not be surprised if the Fed hinted at the possibility of QE3. In the UK, we have the release of industrial and manufacturing production data and the trade balance. 

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

Kymberly Martin is part of the BNZ research team. 

All its research is available here.

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