Equity markets rebound, A$ strengthens on GDP data, Euro worrries ease

Equity markets rebound, A$ strengthens on GDP data, Euro worrries ease

By Mike Burrrowes

NZD

Sentiment towards NZD/USD was buoyed overnight by an improvement in global risk appetite. NZD/USD has gained around 1 cent since yesterday morning to be trading just above 8300.

The NZD was buoyed overnight by a broad based recovery in risk appetite as concerns over the European debt crisis eased. The S&P500 index and Euro Stoxx index surged 2.6% and 3.4% respectively. The VIX index (proxy for risk aversion) dropped from 37.0 to 33.40. Commodity prices rallied overnight, with the CRB index (broad index of global commodities) gaining 1.4%.

The AUD has performed strongly over the past 24 hours, helped by an improvement in global risk sentiment and better-than-expected Australian Q2 GDP data (1.2% vs. 1.1%qoq expected). The Q2 outturn was the fastest pace of quarterly growth in the AU economy in four years. The response in AUD/USD to the data was swift, jumping from 1.0540 to 1.0580. Overnight AUD/USD continued to march higher to be trading at 1.0640 currently.

The strong performance of the AUD saw NZD/AUD take another leg lower. After the release of the AU data, NZD/AUD plunged from 0.7840 to a low around 0.7780. The cross is currently trading at 0.7800. Our flows show leveraged names keen to sell NZD/AUD, although hedging and portfolio demand provided some offset.

The strong AU data has seen the NZ-AU 3-year interest rate differential move back in favour of the AU, from -88bps yesterday to -95bps currently. Accordingly, the implied range from our short-term “fair value” model has shifted down 1 cent to 0.7650 to 0.7850.

The NZD posted steady gains against the EUR and GBP overnight. NZD/EUR is currently around 0.5900, after starting the evening at 0.5880. Further poor data out in the UK (see below) saw NZD/GBP surge from around 0.5170 to above 0.5210. However, a further decline in NZD/AUD has meant the NZD trade-weighted index held steady at 71.70 overnight.

Locally, the only data due for release is Q2 building work at 10.45am. Across the ditch, the focus will be on AU employment data for August. The outturn will be key in proving near-term direction for NZD/AUD. Initial support on the cross is seen at 0.7780 and resistance at 0.7850.

Majors

Risk sentiment improved overnight after concerns around the European debt crisis eased. The improvement in risk sentiment saw the USD fall against all the major currencies. The risk sensitive AUD and NZD were amongst the best performing currencies.

Sentiment towards to EUR was buoyed overnight after a German court rejected a lawsuit to block the country's participation in Eurozone bailouts. This has helped to ease fears that in the near-term the crisis will deteriorate further. Adding to the positive EUR sentiment was better-than-expected German industrial output for July (4% vs. 0.5% expected). EUR/USD has recovered to 1.4090, from 1.4000 yesterday morning. Despite the moves overnight, EUR/USD still remains near the bottom of its recent 1.4000 to 1.4500 trading range.

The market is now focused on the ECB interest rate decision and accompanying press conference tonight. Given the recent slowdown in Eurozone growth it is widely expected the ECB will signal an end to its rate hike cycle. The OIS market is currently pricing around 25bps of cuts over the next 12 months.

Data outturns in the UK continue to disappoint and highlight that the UK economy has all but stalled. Overnight, UK industrial production for July was weaker-than-expected at -0.2% (0.2% expected). GBP/USD was the worst performing currency overnight, remaining broadly flat at 1.5980. While little is expected at the Bank of England’s interest rate decision tonight, there is a growing expectation among analysts that the BoE will conduct further quantitative easing within the next few months.  

Yesterday, the Bank of Japan left interest rates unchanged as expected. However the market was disappointed the BoJ did not announce any new measures to weaken the JPY or support the domestic economy, especially after the actions by the SNB on Tuesday evening. The JPY briefly strengthened against the USD from 77.40 to 77.10 following the release. USD/JPY is currently trading at 77.30.  

The recent global ructions saw several central banks keep rates on-hold overnight. The Bank of Canada left rates on hold overnight at 1%, noting the recent deterioration in global growth would likely mean rates remain on-hold for longer. The Swedish Riksbank left rates on-hold at 2%.   

Looking to the night ahead, focus is shifting to US Presidents Obama’s not so secret speech where he is expected to announce an USD300bn job creation package.  The media suggest the plan will centre on extending payroll tax relief, some infrastructure building and other business tax cuts. Given the US debt ceiling debacle, there is scepticism of how aspects will pass through the legislature.

The market will also be looking to a speech from US Fed President Bernanke for guidance of the Fed’s next move. We get more central bank updates, with the ECB and BoE interest rate decisions. On the data front, the highlights will be the US and German trade balance for July.   
 

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

Mike Burowes is part of the BNZ research team. 

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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 Questions

Currency wars - in Europe e.g. Norway. Will the NZ$ reach 0.88 + vs US$ - soon ? 0.90 - in October/ November ? South American currencies ? Stress for exporters is growing – our economy in danger ?