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Euro summit possible outcome dominates; Italy's government looking shaky

Euro summit possible outcome dominates; Italy's government looking shaky

By Mike Burrrowes

NZD

The NZD/USD was the weakest performer over the past 24-hours declining 1.40%. In addition to a broad easing in global risk appetite, the currency dipped lower after a weaker-than-expected NZ Q3 CPI release.

The Q3 CPI release (0.4%q/q) came in well below market (and our) expectations for 0.7%. The number suggests the RBNZ will be at greater leisure to wait and watch global developments, before being pressured into raising domestic interest rates. Accordingly, we have pushed back our expectation for the first RBNZ rate hike to June next year. The NZD/USD fell in knee-jerk reaction to the release, easing off further overnight as risk appetite waned (see below). The NZD/USD currently trades at 0.7960.

The NZD also weakened on the crosses, as trading in other majors relative to the USD was quite tight. The NZD/EUR eased overnight from 0.5790 to 0.5720. The NZD/GBP dipped back below the 50p mark, declining from 0.5040 to 0.4970 this morning.

The NZD/AUD gapped lower on the NZ CPI release. The NZ-AU 3-year swap spread has fallen further to -107bps, its lowest level since late July. Overnight the NZD/AUD slipped from around 0.7700 to 0.7620, its lowest level since mid-June. Over the medium-term we continue to expect a stronger NZD/AUD as the interest rate differential moves in NZ’s favour, as the market anticipates a closing of the RBNZ-RBA OCR gap.

Today, the NBNZ business confidence survey will be released. We expect confidence to be down from the previous release but to remain positive. Expect the NZD/USD to be whipped around by any changes in risk sentiment approaching the EU summit announcement tonight.

Majors

Risk appetite has waned ahead of the announcement from the EU summit, expected tonight. The “safe haven” JPY and CHF were the best performers over the past 24-hours. The USD was fairly range-bound. Most currency moves were tight, although the NZD/USD was the worst performer, declining 1.40%.

The market has pared its risk appetite in line with growing concerns the EU summit will not deliver on expectations. A clear decision on support for Greece is expected. However, it is feared the announcement may be light on specific details such as quantifying bank recapitalisation and the exact increase to EFSF fire power. In addition, market attention has once again returned to Italy where the government is at risk of collapsing under the pressure of finding agreement on austerity measures.

Our risk appetite indicator (scale 0-100%) ticked down to 33%. Equities declined 1% on the Euro Stoxx 50 and the S&P500 is currently down 1.50%. The USD index is virtually unchanged, trading at 76.10, though it touched a high of 76.50 early this morning. The USD gave back its gains after the release of weaker-than-expected US consumer confidence (39.8 vs. 46 expected) and the Richmond Fed manufacturing survey (-6 vs. 1 expected).

The EUR/USD bobbed sideways, as the market remains in limbo ahead of tonight’s announcement and in the absence of local data releases. It currently trades at 1.3920.

As a group, the “commodity currencies” AUD, CAD and NZD, were the weakest performers over the past 24-hours. The CAD declined 1.20% relative to the USD. The USD/CAD now trades at 1.0150. The AUD traded in a relatively tight range, but has slipped to 1.0440 overnight.

Tonight’s focus will be the expected announcements from the EU summit. During the day we get the release of Australian Q3 CPI data. This will be an important indicator for the RBA that continues to trade off concerns regarding domestic inflation with worries regarding the impact of global financial disruptions on the Australian economy. Tonight, we also get US durable goods orders.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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