Markets in limbo waiting for Euro "solution" developments; AUD down on low "core" CPI

Markets in limbo waiting for Euro "solution" developments; AUD down on low "core" CPI

By Mike Burrrowes

NZD

The NZD/USD traded sideways overnight before some volatility early this morning saw the NZD trade a little lower to 0.7960.

Yesterday, the NBNZ business survey showed that business expectations continue to come off their highs. However the survey was still strong enough to suggest reasonable GDP growth ahead. The “own activity” component moderated to 26.1 from 35.4. Net confidence slipped to 13.2, from 30.3. The currency took the release in its stride, without much reaction.

In mirror-image of the previous day’s event, the NZD/AUD gapped higher after the release of Q3 Australian CPI. As it came in below expectation (see below) the market responded by increasing expectations of rate cuts from the RBA. Australian yields fell sharply. The NZD/AUD gapped from 0.7630 to 0.7680, drifting off early this morning to 0.7650.

Relative to the European currencies, the NZD was relatively range-bound. The NZD/EUR trades at 0.5720, at similar levels to yesterday morning. The NZD/GBP is trading at similar levels of 0.4980.

Today’s focus will be the RBNZ meeting where we expect it to remain on hold and to publish a relatively neutral statement.

Majors

Markets appeared to be in limbo overnight with the uncertainty of the EU summit dominating sentiment. The USD traded sideways with some volatility. The CAD was the strongest performer.

Our risk appetite index was fairly steady at 32% overnight. Equity markets were mixed, with the Euro Stoxx 50 down 0.40% and the S&P500 currently up 0.60%. Commodities similarly, showed divergent trading patterns. For example, WTI was down 2.9% and copper up 2.4%.

The USD was relatively stable until the early hours of this morning when volatility saw it spike to above 76.60 before returning to trade around 76.20 currently. The market responded to rumours (later denied) that China had agreed to invest in the EU bailout fund.

The JPY once again held its own against the USD. It touched a new a new post-war high and now trades at 76.20. The Japanese Finance Minister has warned authorities are ready to take “decisive action” in the currency market. Speculation as to whether the BoJ will go as far as the Swiss National Bank in providing a specific target, is once again rife.

The EUR has returned to trade at similar levels to yesterday morning after some volatility overnight. In addition to taking a “wait and see” approach to the EU summit, the market continued to absorb Italian developments. The Italian government sent a letter to EU authorities to try to convince them of their intentions for fiscal reform, although cautioning that it was “no road map”. The EUR currently trades around 1.3900.

The CAD was the strongest performer over the past 24-hours, rising 1.0% relative to the USD. The Bank of Canada monetary policy report was released highlighting downside risk to the global outlook. However, earlier this week it kept rates at 1.0%, whereas previously the market had priced some chance of a rate cut. The USD/CAD traded down from 1.0170 to 1.0070 overnight.

The AUD and NZD were amongst the weakest performing currencies over the past 24-hours. The AUD/USD gapped lower after the release of Q3 Australia CPI data. The data showed the trimmed-mean for the quarter at 0.3% (0.6% expected) to take the annual level to 2.3% (2.7% previously). This resulted in markets moving to price 120bps of rate cuts from the RBA in the coming year, with a 25bp cut fully priced for its next meeting. The AUD/USD has declined 0.40% over the past 24-hours to 1.0390.

Today the market will continue to focus on any announcements from EU officials. Tonight, we also get EU confidence data and US Q3 GDP.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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