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BNZ sees some downside risk to NZ$/US$ as risk appetite fades

BNZ sees some downside risk to NZ$/US$ as risk appetite fades

By Mike Burrrowes


NZD/USD traded with a downward bias at times on Friday night. NZD/USD fell to an intra-day low around 0.7880 as global equity markets fell sharply (see Majors section below). A recovery in risk sentiment late Saturday morning has seen the currency recovery to 0.7950.

Our NZD/USD “fair value” range has fallen almost 1 cent to 0.7260 – 0.7460 over the past week, suggesting some downside risk to the currency in the near-term. The move lower over the past week was driven by a fall in the NZ-US 3-year interest rate differential falling from 2.67% to 2.65%; and fall in our weekly risk appetite index from 43.7% to 38.9%.

NZD/AUD briefly fell to 0.7610 on Friday night, but has recovered to around 0.7650 currently. Our short-term NZD/AUD model suggests the cross is fairly valued at this level. The fair value range is currently 0.7600 to 0.7800. However, over the next 12 months we continue to forecast a gradual appreciation in the cross to around 0.8500. The move higher will be driven by a sharp narrowing in NZ-AU interest rate differentials as we expect the RBNZ to raise rates by around 100bps over the next 12 months. In contrast, our NAB colleagues expect another 25bp cut from the RBA over the next 12 months.     

Looking to the week ahead, the local highlight will be the release of the RBNZ six-monthly Financial Stability Report on Thursday morning. Soon after the FSR, check out the Government’s September quarter accounts. Is the fiscal situation improving as much as expected, following the quake-impacted 2010/11 fiscal year? As for the monthly reports, on Wednesday we have electronic card transactions for October. On Thursday, we have the BNZ PMI and ANZ-RM consumer confidence data due for release. Friday completes the data week with Food Prices for October.


Concerns on Friday night about a ‘disorderly’ Greek default kept risk sentiment on the back foot. In this backdrop, there was some “safe haven” demand for the USD.

The ongoing concerns about Greece saw equity markets slide again on Friday. The Euro Stoxx 50 index shed another 2.4% and ended the week down almost 7%. The S&P500 index lost only 0.6% on Friday night. Our risk appetite (scale 0 – 100%) remained unchanged at 34.5%, we below its long-run average of 50%. US 10-year government bonds dropped 5bps to 2.03%.

EUR/USD shed over 1 cent to 1.3710 early Saturday morning. The move occurred after the draft of the G20 communique disappointed markets by not providing any new policy measures to stem the European debt crisis. Markets were hoping for a stronger commitment from the G20 to bolster the EFSF. A late session recovery in US equity markets – recovering from -1.8% to -0.6% - saw EUR/USD bounce back to 1.3800.

US non-farm payrolls for October were weaker-than-expected (80k vs. 95k expected). However, the details were better, with upward revisions to last month’s data and a fall in the unemployment rate (9.0% vs. 9.1% previously). However, the reaction to the employment data was muted, highlighting a market exhausted after a week of European headlines.

The risk-off tone in markets saw the USD index rise 0.3% to 76.90. In this backdrop, the risk sensitive AUD/USD fell from above 1.0400 to 1.0360. GBP/USD briefly fell to 1.5950 during the evening, but ended the week at 1.6030.

The CAD was the weakest performing currency on Friday, after the release of shocking employment data for Q3 (-54k vs. 15k expected). On the release of the data, USD/CAD surged from 1.0100 to an intra-day high of 1.0220.   

Over the weekend, the much-hyped G20 meeting turned out to be a bit of a dud with a decided lack of meaningful progress on the major elements of the latest EU debt plan. In particular, there is resistance from Germany to the plan put forward by other members to increase resources for the IMF to enable it to boost the firepower of the EFSF. Overall it sounds as though the leaders were sidetracked by the dramas in Greece. While not the focus for markets right now, the G20 communique noted the need to accelerate moves towards market-driven exchange rates and mentioned China for the first time in that context.

Shortly after the close of markets on Saturday morning news broke that the Greek Prime Minister had won a parliamentary confidence vote, thereby seemingly avoiding a snap election that could have meant the end for the EU bailout deal. This should pave the way for a new coalition government in Greece to be formed.

Looking to the week ahead, the focus is likely to remain on the European debt crisis. On the data front, we have Eurozone retail sales tonight; UK industrial production on Tuesday; Chinese CPI, industrial production and retail sales on Wednesday; and the US University of Michigan consumer confidence survey on Friday. On the cental bank calendar, we the Bank of England rate decision on Thursday and several Fed speakers throughout the week.  

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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