By Mike Burrrowes
The NZD continued to struggle on Friday night as concerns over a potential Greek default weighed on risk sentiment. NZD/USD traded to its lowest level since early April during Friday evening around 0.7730. The NZD failed to keep pace with the recovery in EUR/USD in the early hours of Saturday morning to close the week at 0.7760.
Our NZD/USD “fair value” range has fallen over a cent since last week to 0.7230 to 0.7430. The “fair value” range has been driven lower by a fall in the NZ-US 3-year interest rate differential from 2.86% to 2.59%; and drop in our risk appetite index from 38% to 33.3%. The OIS market now expects a little more than 20bps of hikes from the RBNZ over the next 12 months, expectations that we believe will ultimately be revised higher.
The NZD lost ground relative to the AUD on Friday night. The cross fell from 0.7980 to 0.7930 currently. Our NZD/AUD “fair value” range has fallen around ½ a cent to 0.7720 to 0.7920. The decline in the “fair value” range was driven by the NZ-AU 3-year interest rate differential becoming more negative from -81bps to -94bps, over the past week.
Looking to the week ahead, the main fixture will be Friday’s NBNZ business survey. Also during the week we have merchandise trade data today, building consents and credit aggregates on Friday. We are expecting reasonable outcomes for all of these data points, but will be looking for any hints the recent global ructions have dented the domestic recovery.
The other report to note is the relatively new National Employment Indicator for July, due on Tuesday. This will give an insight into a labour market we believe to be still ticking along, albeit not picking up the pace just yet.
FX markets ended the week on a relatively calm note, following the dramatic moves seen on Thursday night. The USD index ended the Friday session broadly flat around 78.40, but has gained around 2.5% over the course of the week.
While sentiment stabilised on Friday, it was one of the more tumultuous weeks for world markets. The ructions were spurred by fears of a disorderly Greek debt default and the Federal Reserve's downbeat outlook for the U.S. economy. On Friday, the S&P500 and Euro Stoxx 50 index eked out gains of 0.6 and 1.5% respectively. Despite the gains, both indexes ended the week down over 6%. Despite the bounce in equity markets, our risk appetite index (scale 0 – 100%) fell from 24.3 to 23.9% on Friday. The index is now at its lowest level since August 2009.
EUR/USD spent Friday night oscillating around 1.3500. EUR/USD traded down to an overnight low of 1.3420 after a German official noted they will reject the joint Eurobond proposal. Adding to the short-term weakness in the EUR were unsubstantiated rumours of an emergency rate cut by the ECB.
EUR/USD recovered the losses in the early hours of Saturday morning after talk emerged of replacing the European Financial Stability Fund (EFSF) with the European Stability Mechanism (ESM) in 2012, instead of 2013. In addition, the ESM would be given more capital.
While the concerns over a disorderly default by Greece remain, expect EUR/USD trading to remain very volatile. In this regard, the Troika (EU/IMF/ECB) are expected to return to Greece this week to continue negotiations over releasing the next aid payment. The talks stalled last week as the Greek government has failed to implement the necessary fiscal cuts.
The G20 meeting in Washington on Friday/Saturday again lacked any concrete details but media reports over the weekend suggest some progress is being made behind the scenes to deal with the Greek crisis. It now appears EU policy makers will focus on a “managed Greek default” (likely to be announced at the next G20 meeting in November). Indeed, German Finance Minister Schaeuble told reporters that Germany is open to the idea of leveraging the EFSF fund to cope with a Greek default.
Measures of funding pressures in Europe widened further on Friday night, after Deutsche Bank warned European banks could face large-than-expected write-downs on Greek government debt. The 3-month EURIBOR-OIS spread (a measure of bank funding pressure) widened to 89bps, its widest levels since March 2009.
The broad moves in the EUR were mirrored in the other major currencies. GBP/USD traded to a low of 1.5380 early in the evening, but has since recovered to around 1.5470 currently. Expect gains on the GBP to be hard fought as speculation the Bank of England will restart quantitative easing increase.
The modest improvement in risk appetite saw the JPY weaken against the USD. USD/JPY fell to 76.10 during the evening, but recovered back to 76.60 in the early hours of Saturday morning.
Looking to the week ahead, expect markets to remain fixated on the European debt crisis. On the data front, there is a mix of housing numbers from the US through the week, as well as the IFO and GFK updates from Germany and Eurozone sentiment numbers later in the week.
Mike Burowes and Kimberly Martin are part of the BNZ research team.