"Commodity" currencies strengthen as market reacts to Merkel-Sarkozy Euro stability "determination"

"Commodity" currencies strengthen as market reacts to Merkel-Sarkozy Euro stability "determination"

By Mike Burrrowes and Kymberly Martin

NZD

The NZD gained 1.90% relative to the USD over the past 24-hours. The USD weakened broadly as risk appetite in markets was boosted by market optimism surrounding the European debt crisis. The NZD currently trades around 0.7840.

It was a relatively calm day yesterday as the US enjoyed Columbus Day holiday. There were no major global data releases and no negative news flow from Europe. In this backdrop, “risky” assets rebounded and the USD fell relative to all its major peers. The NZD/USD marched higher over the past 24-hours from 0.7700 to 0.7850.

Relative to the EUR, the NZD was range-bound overnight trading between 0.5730 and 0.5760, currently trading at 0.5740. The NZD made steady progress last night relative to a GBP that continues to face the headwinds of further UK quantitative easing. The NZD/GBP traded up from 0.4950 to above 0.5000.

Today, NZ electronic card transactions for September will be released. Despite signs of a very sharp increase in spending early in the month as the Rugby World Cup started, for the month overall spending looks to have only posted a moderate rebound from August’s dip. Today we also receive the full 2010/11 fiscal year accounts.

Majors

Over the past 24-hours USD weakness was the broad theme in currency markets. All currencies traded up relative to the USD as risk sentiment improved across markets.

Risk appetite improved after the earlier joint statement by France’s Sarkozy and Germany’s Merkel of their determination to defend the stability of the euro and their banking sector. In its current jittery state, the market was also bolstered by no further bad news yesterday. The VIX index (a proxy for risk aversion) eased from 36 to 32. Equities posted strong gains of 2.3% on the Euro Stoxx 50, while the S&P500 is currently up 2.8%. The WTI oil price gained 3.2% and the CRB global commodity index is up almost 2.0%.

Against this backdrop, the “safe haven” USD and JPY were the weakest performers over the past 24-hours. The USD index declined steadily from 78.80 to 77.50 this morning. The USD/JPY bobbed around 76.70 overnight, trading at 76.60 currently.

The EUR/USD strengthened overnight as sentiment turned away from the USD in the absence of negative headlines relating to the European debt crisis. It has moved up steadily from around 1.3350 to 1.3660 over the past 24-hours, its highest level in 3 weeks.

Trading in the GBP was a little more choppy. Overnight, the Bank of England rejected all offers of a UK government bond it intended to buy as part of its recently extended quantitative easing program. The BoE felt market pricing had been distorted in anticipation of its buying. The GBP/USD gained 0.70% over the past 24-hours to trade at 1.5680 currently.

The “commodity-linked” AUD, CAD and NZD all made solid gains relative to the USD, with the AUD being the best performer. The AUD broke above parity in the early hours of this morning for the first time in 3 weeks, now trading around 0.9990.

The best performing currency over the past 24-hours was the CHF, rising 2.60% relative to the USD. Since the Swiss National Bank’s intervention last month the CHF now trades less as a “safe haven” currency. Investors appear to respect the Bank’s intention to maintain the EUR/CHF at a minimum of 1.2000 as stated. As appetite for the USD waned yesterday the USD/CHF declined from 0.9290 to 0.9030. The EUR/CHF dipped from 1.2420 to 1.2330.

Global highlights will be the release of the Fed’s September minutes tonight and UK industrial production data. This afternoon we get the Australian business confidence release.

Fixed Interest Markets

NZ yields inched a little higher again yesterday across the curve. Overnight, German “risk free” bond yields made 5 week highs.

Yesterday, NZ swap yields moved higher by 3-4 bps across the curve following on from moves seen offshore. 2-year yields now trade at 3.13%, having convincingly bounced off their 3% lows in the past few days. The market continues to price little more than one 25bp hike by the RBNZ in the coming year. The NZ-AU 3-year swap spread has fallen sharply to -1.05% in recent days as Australian short-end yields have risen more sharply than their NZ counterparts. This is reflective of market expectations for RBA rate cuts in the coming year that have been revised back from -150bps to less than -140bps now.

NZ bond yields also moved gradually higher yesterday, by 4-5bps across the curve. The yield on 21s now sits at 4.50%. Its yield differential to its Australian counterpart remains around 20bps. With similar moves seen across NZ swap and bond markets, swap spreads remain modestly positive.

Overnight, US bonds did not trade during the US Columbus Day holiday, however German 10-year yields crept up from 2.00% to 2.08% as risk appetite improved. This is their highest level in 5 weeks as relative quiet on the home-front in the European debt crisis saw investor demand for “safe haven” bonds wane.

Today’s NZ data releases should not be big market movers so expect NZ interest rate markets to continue to take their cue from off-shore. Expect more upward pressure to yields today given positive sentiment and rises in offshore equities overnight.

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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