Equity market falls prompt renewed rush to safety. NZ$ falls below US$0.81

Equity market falls prompt renewed rush to safety. NZ$ falls below US$0.81

By Kymberly Martin and Mike Burrowes

NZD

The NZD was the worst performing currency over the past 24 hours as global equity markets posted large losses. Overnight, NZD/USD fell from 0.8320 down to 0.8080.

The move lower was exacerbated by real money and custodial names selling NZD/USD. These flows were largely related to rebalancing of their offshore portfolios.

The sharp move lower in NZD/USD triggered stop-loss selling of the NZD/AUD cross. This has seen the cross fall back to 0.7930, from around 0.8050 yesterday. We expect decent support on NZD/AUD around 0.7880 and resistance around 0.8050.

The NZD underperformed against the EUR and GBP overnight. NZD/EUR dropped from 0.5820 to 0.5720 currently. NZD/GBP fell to 0.5030, after starting the evening at 0.5130. Looking beyond the recent spike in risk aversion, we expect relative interest rate and growth differentials to support the NZD on the crosses.

Looking to the day ahead, we have the business NZ PMI, ANZ consumer confidence and REINZ house prices. In Australia, we have the monthly employment update and consumer inflation expectations.
Initial support for NZD/USD is eyed around 0.8050 and resistance around 0.8200.

Majors

The USD rallied against nearly all the major currencies as risk aversion continued to dominate in FX markets. Overnight rumours swirled of a downgrade to France’s sovereign credit rating and possible collapse at one of the major French banks.

The French concerns saw the Euro Stoxx 50 index plunge 6.1% overnight, with the financials equity sector down over 8.5%. Since the beginning of the month the Euro Stoxx 50 index is down almost 20%. The S&P500 has reversed yesterday’s Federal Reserve inspired rally, falling 4%. The VIX index (proxy for risk aversion) spiked back to 42, from 40 yesterday.    

The EUR come under pressure after rumours swirled of a possible French sovereign credit downgrade. Added to this was a rumour French bank Societe Generale was on the brink of collapse. This saw its share price plummet by 22% at one stage, ending down 15%. A spokesperson for Societe Generale denied all rumours.  

These concerns saw EUR/USD drop from 1.4350 to a low around 1.4160 overnight. EUR/USD partially recovered the losses early this morning after the 3 major rating agencies confirmed France’s triple-A rating.
GBP/USD dropped ½ cent to 1.6190 after the release of the Bank of England quarterly inflation report. In the report, the BoE downgraded its growth forecast and noted inflation will fall rapidly in 2012. GBP/USD was dragged lower by EUR/USD early this morning to be trading at 1.6140.  

The Swiss National Bank announced some further measures to help curb the strength in the CHF overnight. The SNB will flood the market with more CHF and conduct FX swaps, all in a bid to make holding CHF less attractive. For now, these measures will be ineffective while investors remain concerned about the situation in the US and Europe. Overnight, USD/CHF weakened from 0.7200 to 0.7290.

The spike in risk aversion saw USD/JPY fall to 76.30, just shy of the record low at 76.25 following the Japanese earthquake. The moves were partially revered after Japanese Finance Minister Noda hinted they may intervene again, noting he would communicate closely with the G7 nations about exchange rates.  

Looking to the night ahead, expect trading to remain volatile as the market continues to fret about a global slowdown. The only notable data release is the US trade balance and initial jobless claims.

Fixed Interest Markets

NZ short-end yields rose sharply off recent lows yesterday after the US FOMC statement prompted a surge in global equity markets.

NZ 2-year swap yields rose 16.5bps to 3.35%, back to the middle of their range from April to mid July. The rise in 10-year yields was more muted at 3.5bps as they continue to be weighed on by low off-shore long rates. The result was a flattening of the 2s-10s curve to 158bps.

The move higher in bond yields was slightly more uniform across the curve. The yields on 13s rose 10bps while the yield on 21s rose 5.5bps to 4.50%. 10-year swap spreads (EFP) remain above 40bps. The DMO has announced a limited 150m auction today, split between 100m of 15s and 50m of 23s.

Overnight, the rally in US and Asian equities was cut short by renewed concerns regarding the health of the Eurozone. There was speculation about the strength of some banks, along with France’s AAA sovereign rating coming under the spotlight. France’s CDS swap spreads (a measure of the markets perception of default risk) have risen from around 80 to 175 since the start of July

Putting that in perspective, NZ CDS spreads sit around 90, US around 50, Italy at 380 and Ireland at 790.  A downgrade to France’s AAA rating would draw into question the AAA rating of the European Financial Stability Facility (EFSF).

After the ECB’s efforts to buy Spanish and Italian bonds, yields on their 10-year sovereign bonds have fallen to around 5% after peaking above 6%.

NZ yields will probably open under downward pressure today, given developments overnight. Curve flattening pressure will likely continue.

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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Societe General denying rumours that they are virtually bankrupt - does this sound familiar... Lehman Brothers anyone?

The reality is that any bank at any given time can be taken down by a 'run on the bank'. If everyone pulls their deposits at the same time, they do not have enough cash on hand to cover it. All it takes is a crisis in confidence.

It sounds to me that with the Swiss and Japanese debasing their currency, that the currency wars have begun. Not everyone can have a low currency at the same time ... someone's currency has to go up! How long can this 'race to the bottom' go on until someone goes bankrupt?