Markets lacking direction, awaiting ECB policy decision and news on Euro bank recapitalisation

Markets lacking direction, awaiting ECB policy decision and news on Euro bank recapitalisation

By Mike Burrrowes and Kymberly Martin


NZD/USD has ground higher overnight as better US data and hopes EU leaders will finally take action to stem the crisis helped to bolster risk sentiment. NZD/USD is currently around 0.7660, after starting the evening just above 0.7600.

The NZD edged higher throughout the evening against the EUR and GBP. Gains on the EUR and GBP against the USD were tempered by concerns the ECB and Bank of England will deliver dovish policy statements tonight. NZD/GBP is currently trading at 0.4950, from around 0.4920. NZD/EUR is just above 0.5730.

NZD/AUD eased lower over the past 24 hours, helped by some better-than-expected AU data yesterday. The cross reached a high overnight of 0.7970, but is now trading around 0.7930. While the global ructions continue, we expect the cross to remain in the recent range of 0.7800 to 0.8100.

Looking to the day ahead, with no local data out, expect the NZD to take its cues from offshore. Initial support on NZD/USD is eyed at 0.7620 and resistance at 0.7720, on the day.


Trading has remained volatile in FX markets overnight, but most of the major currencies lacked any real direction as they await some key events tonight. The EUR is broadly flat against the USD, while a modest rebound in risk sentiment has helped the NZD and AUD edge higher.

In equities, the S&P500 and Euro Stoxx 50 index gained 1.1% and 4.2% respectively. Despite the recovery overnight, risk sentiment still remains extremely poor. Our risk appetite index (scale 0 – 100%) is languishing below 24%, its lowest level since the Global Financial Crisis in 2008/09.  

EUR/USD lacked direction overnight. Early in the evening EUR/USD gained almost 1 cent to an overnight high of above 1.3370, helped by hopes EU leaders would announce measures to recapitalise the banking system. However the gains were short-lived as investor enthusiasm waned, seeing EUR/USD fall to 1.3280. A rally in US equities over the past hour has helped EUR/USD recover to 1.3360 currently.   

For now, expect any gains in the EUR to be limited until EU leaders can provide the market will clearer details on how they plan to stem the crisis. In addition, confirmation that Greece will receive its next aid payment will help to allay fear of a ‘disorderly’ default.  

Data outturns in the US were encouraging, but with fears of a credit crunch in Europe, the market is overlooking better data outturns relative to negative data outturns. ADP employment for September was-better-than-expected (91k vs. 75k expected). This is seen by some as a good leading indicator for Friday’s important non-farm payrolls. ISM non-manufacturing for September beat expectations at 53.0 (vs. 52.8 expected).

The GBP was briefly boosted by better-than-expected UK PMI services for September (52.9 vs. 50.5 expected). However, the reaction was short-lived as UK GDP for Q2 disappointed (0.1% vs. 0.2%q/q expected). In addition, there is some risk the Bank of England could announce further quantitative easing at its policy meeting tonight.  Although, according to the latest Reuters poll of analysts, the majority expect the Bank will wait until November to restart quantitative easing. GBP/USD is currently trading around 1.5470, from 1.5440 at the beginning of the evening.  

Looking to the day ahead, the focus will be on central bank decisions from the ECB and BoE. Expect some comments from ECB President Trichet at the accompanying press conference. On the data front, we have German factory orders and US initial jobless claims.

Fixed Interest Markets

NZ yields declined yesterday and swap-bond spreads narrowed. Overnight, US and German 10-year yields rose as risk sentiment improved.

NZ swap yields declined across the board yesterday, in an atmosphere of heightened risk aversion. 2 and 5-year swap yields made new lows at 2.98% and 3.64% respectively. The market has further revised down its expectations for OCR rate hikes, to just 13bps in the coming year. 10-year swap yields also declined by 6bps yesterday, to 4.33%. This is slightly above previous lows. The 2s-10s swap spread sits around 135bps, off the recent lows of 127bps.

Bond yields were more stable, but also declined around 2bps along the curve. The yield on 13s closed at 2.78%, and that on 21s at 4.34%. Long bond yields have given up much of the gain incurred after last week’s sovereign downgrade by S&P and Fitch. The market has returned its focus to global concerns.

The DMO announced a modest 200m tender for today, spread across 15s,19s and 23s. Demand should remain relatively solid despite the recent NZ downgrade, as investors remain risk averse, and continue to seek comparatively “safe” assets. The narrowing of swap-bond spreads should also help underpin demand for bonds. As swap yields have fallen more sharply than bond yields, 2-year and 10-year EFP have narrowed to 8bps and zero respectively. Another support for NZ bonds is their yield to relative to Australian counterparts. The NZ 10-year yield is still 27bps above the AU equivalent that trades at 4.07%.

Overnight, market sentiment was boosted by positive US data outcomes, and hopes of more decisive action by officials in the European debt saga. US 10-year yields rose from 1.82% to 1.90%, some way above the lows of 1.72% reached when the Fed announced “operation twist”. German 10-year yields also rose from 1.75% to 1.84%.

Fixed interest market showed little reaction to rating agency Moody’s downgrade of Italy’s sovereign rating by 3 notches. This takes their rating to A2 with a negative outlook, closer to that already held by rival agency S&P. Italian 10-year bond yields continue to trade around 5.50%, someway below the 6.20% level they touched prior to the ECB purchasing Italian bonds.

Tonight, the ECB will announce its interest rate decision. The market is pricing around 50% chance of a 25bps cut. The BoE will also announce its decision, where the market expects it to remain on hold.

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

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

All its research is available here.

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Do you feel the risks are only a tad higher?....good for you.....I'm busy stacking away the cans of beans and bags of grain, the booze and the ammo...soon have the veg garden sorted and the chooks laying.

I think we are as safe as NZ houses!