Rumours suggest that a fully formed Euro solution to be presented at EU summit this weekend

By Mike Burrrowes

NZD

The NZD was one of the better performing currencies over Friday night as risk sentiment was buoyed by hopes EU leaders will announce a bold plan to stem the debt crisis. Over the course of the evening, NZD/USD surged from below 0.7950 to around 0.8030 currently. NZD/USD has bolted 3 ½ cents higher over the past week as the European debt crisis eased.

Our “fair value” model has moved over 1 ½ cents higher to 0.7200 to 0.7400 over the past week. The “fair value” range was driven higher by a surge in our risk appetite index; and move higher in the NZ-US 3-year interest rate differential from 2.43% to 2.51%.

The NZD made steady gains against the EUR and GBP on Friday night. NZD/EUR marched from 0.5770 to just below 0.6000 currently. NZD/GBP moved from 0.5040 to 0.5090. We see further upside to both crosses by the end of the year.

NZD/AUD spent the evening treading water under the 0.7800 level. The move lower over the past week was largely driven by NZ-AU interest rate differentials moving in the AUD’s favour. The NZ-AU 3-year differential is now   -105bps, from -95bps at the beginning of the week.

Looking to the week ahead, expect the NZD to take its cues from developments in the European debt crisis. In terms of the local data, there is a trickle of second tier data to keep an eye on this week. Today we have the Performance of Services Index, on Wednesday morning we get the bi-monthly Fonterra dairy auction, and the week rounds out with credit card billings on Friday.

Majors

The European debt crisis eased further on Friday night as hopes mounted EU leaders would announce a comprehensive plan by the EU Summit on October 23. These hopes helped to buoy risk sentiment and pushed the “safe haven” USD and JPY lower against all the major currencies.

The recovery in risky assets was broad based. In equities, the S&P500 index and Euro Stoxx 50 index gained 1.7% and 1% respectively. The VIX index (proxy for risk aversion) eased to 28.2, from above 30.0. Commodities lead the moves higher, with the CRB index (broad index of global commodities) surging 2%.

The improvement in sentiment occurred after the G20 Finance Ministers resorted to unusually direct language to demand that their European colleagues come up with a comprehensive plan to "decisively address the current challenges" by Oct 23 when the EU Summit ends.

Indeed, media reports over the weekend suggest that EU leaders are working frantically behind the scenes to cobble a plan together. The UK Telegraph reported on Saturday that Germany and France are spearheading a €2 trillion "shock and awe" program. It is expected to be completely finalized at the EU Summit concluding Sunday Oct 23 and then presented the following week at the G20 Summit in Cannes. In addition, the Financial Times reported €100 to 200bn would be used to recapitalize the banks.

EUR/USD made very solid gains on Friday night, rising over 1 cent to 1.3880 this morning. Expect trading in the EUR to remain volatile as various EU leaders/officials voice their opinions about the bailout package.

In the backdrop of improved risk sentiment, the USD index shed 0.6% to 76.60. The JPY was the worst performing currency over Friday night, with USD/JPY rising to 77.20 from below 77.00.

US data outturns were mixed on Friday. The University of Michigan Consumer confidence for September was weaker-than-expected at 57.5 (60.2 expected), while retail sales for September expanded 0.5% (0.4%m/m expected)

The risk sensitive AUD/USD was the best performing currency on Friday, rising 1.8% to 1.0340. Over the course of the week AUD/USD has rallied over 6 cents, helped by an easing in European debt tensions and better Australian economic data.

Looking to the week ahead, the focus is likely to stay on the Eurozone as there is a huge amount riding on the EU coming up with a credible plan by the end of their Summit on Oct 23. The focus may shift back to the US at times, with speeches from Federal Reserve Governor Bernanke and several other Fed members throughout the week. The Fed’s beige book on Wednesday will give some further insight into the state of the US economy.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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1 Comments

This is priceless, "The European debt crisis eased further on Friday night as hopes mounted EU leaders would announce a comprehensive plan by the EU Summit on October 23 " "debt crisis eased".  In real life the debt crisis continues to build as the debt gets bigger and the ability to repay is gone.  You cannot ease a debt crisis with hope.