Risk markets rebound on increased confidence about the Italian political situation and comment from Greek PM

Risk markets rebound on increased confidence about the Italian political situation and comment from Greek PM

By Mike Burrrowes

NZD

The NZD/USD ended Friday the best part of 1 cent higher around 0.7850. The move higher was led by an improvement in global risk sentiment as hopes mounted Italy would pass much need austerity measures. Expect the market to continue to be headline driven for now as the European debt crisis remains far from resolved.

The implied range from our NZD/USD “fair value” fell over 1 cent last week. The NZD/USD “fair value” is currently 0.7150 to 0.7350. The move lower in the “fair value” range was driven by the NZ-US 3-year interest rate differential falling from 2.65% to 2.34%. Ultimately we expect the “fair value” estimate to move higher as expectations of rate hikes from the RBNZ increase and risk sentiment improves.

The NZD was relatively subdued against the EUR and GBP. NZD/EUR briefly fell to 0.5680 but is now above 0.5700. Price action in NZD/GBP was similar, oscillating around 0.4880 throughout the evening.

On the local front, will today’s Performance of Services index lose a lot of momentum, or, will such things as the Rugby World Cup be a net boon for the services side of the economy? Take your pick. As for today’s retail trade report, we are at the low end of the market range (-0.1 to +1.1%), in expecting a 0.1% dip in Q3 volumes. However, ex-auto will probably be up, to a creditable degree – a better representation of the trend. We expect dairy prices at Wednesday morning’s Fonterra auction to hold-up. Also on Wednesday we have the NBNZ business survey.

Looking to the day ahead, support on NZD/USD is eyed at 0.7800 and resistance at 0.7920.

Majors

A broad based recovery in risk sentiment saw all the major currencies rise against the USD. Risk sentiment was bolstered by expectations the Italian parliament would pass austerity measures, and supportive comments from the Greek Prime Minister.

The recovery in sentiment was broad based across markets. The S&P500 index and Euro Stoxx 50 index surged 2.0% and 3.1% respectively. Our risk appetite index (scale 0 – 100%) rose from 32.0% to 34.3%. The CRB index (broad index of global commodity prices) rallied 0.4%.

EUR/USD marched higher throughout the evening, rising from 1.3630 to 1.3750.  Sentiment towards the EUR was lifted by hopes the Italian parliament would pass planned austerity measures. In the event, the Italian lower house followed the earlier lead of the Senate in passing the austerity package on Saturday. Over the weekend, Berlusconi then resigned as Prime Minister after 17 years in power. Italian President Napolitano is holding talks with political leaders and is expected to ask former European Commissioner Mario Monte to form an emergency government as soon as Sunday night Italian time.

The next test for Italy will come tonight with a planned auction of €3bn of 5-year government bonds. Will investors feel confidence enough to return now Berlusconi has resigned? Spain is also planning a 10-year bond auction on Thursday night.

Sentiment was given a further boost by comments from Greece’s newly appointed Prime Minister Papademos, noting the unity government will do its utmost to deal with the crises-stricken country’s problems.

While Greece and Italy are making progress, there seems to be little development by the EU to expand the EFSF’s firepower to €1t. Indeed, an article in the UK Telegraph noted the EFSF fund resorted to buying its own debt at last week’s action due to a lack of demand. This was later denied by the European officials. Expect more focus on this aspect of the EU rescue package in the week ahead.

The recovery in risk sentiment saw “safe haven” demand for the USD and JPY wane. The USD index shed almost 1% to 77.00. The JPY was the worst performing currency against the USD, with USD/JPY currently around 77.10. The Japanese Finance Minister Azumi again threatened to intervene in the JPY, noting he was “closely watching with interest to see if there are any speculative and disorderly movements” in the JPY.  

The Swiss National Bank was also on the attack on Friday night. SNB board member Danthine noted "we are continually observing developments and are ready, if that is necessary, to take further measures". One possible action would be for the SNB to lift the floor on EUR/CHF from 1.20.

Looking to the week ahead, on Tuesday we have French and German GDP for Q3, UK CPI and US retail sales. Wednesday brings the Bank of England inflation report, US CPI and industrial production. On Thursday the highlights will be UK retail sales and US Philadelphia Federal manufacturing index. The week rounds out with speeches from ECB President Draghi and board members Gonzalez-Paramo and Smaghi.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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