By Mike Burrrowes
NZD
Overnight, the NZD headed south again as developments in the European debt crisis weighed on sentiment. The spotlight was on rising Eurozone government bond yields. NZD/USD fell to a low overnight around 0.7670 and is currently trading just above 0.7700.
Early this morning, average dairy prices at Fonterra’s fortnightly auction rose a solid 2.6%. This is a strong result, helped by a stabilisation in global commodity prices over the past fortnight.
The NZD/AUD was shunted lower after yesterday’s RBA minutes. We again noted commercial flows assisting the move to levels not seen since late May this year. The take out from the minutes was that the RBA are not moving to an easing bias – sure they have concerns and can identify the global nature of risks to the local economy – but at the end of the day they’re optimists.
This saw the NZ-AU 3-year interest rate differential move in favour of the AUD, to -102bps from -97bps. Across the Tasman, we have the wage cost index for Q3 and Westpac leading index due for release today.
Looking to the day ahead, there is no local data for release. On the day, support on NZD/USD is eyed at 0.7670 and resistance at 0.7760.
Majors
Risk sentiment continued to fade overnight as the European debt crisis rumbles on. The focus was again on rising bond yields for several European countries. European currencies were the hardest hit against the USD over the past 24 hours.
The S&P500 index is currently up 0.6%, while the Euro Stoxx 50 index shed 1.5%. The VIX index (proxy for risk aversion) rose from 31.10 to 31.90. Commodity prices bucked the weakness seen in other markets, with the CRB index (broad index of global commodity prices) rising 0.8%.
EUR/USD dribbled lower throughout most of the evening, falling from 1.3620 to 1.3540 currently. The focus was again on rising Eurozone bond yields, highlighting that further actions will be needed to stem the European debt crisis. There is some speculation EU leaders could meet in late November to discuss further measures. The next scheduled EU leaders meeting is for 8 and 9 December.
In a further sign of contagion with the region, Austrian, Belgian and French 10-year bonds rose to record high spreads against German 10 year bonds. The rising bond spreads reflect concerns that these countries will have to provide further capital to boost the EFSF’s firepower to the proposed €1t.
Further dampening sentiment, the German ZEW survey for November showed investor sentiment plunged (-55.2 vs. -52.0). This was partially offset by a better than expected Eurozone trade surplus for September (2.1b surplus vs. 1.5b deficit expected). Eurozone GDP for Q3 was in line with expectations at 0.2% q/q.
GBP/USD was dragged lower by concerns in Europe, falling from 1.5890 to around 1.5820 currently. Further pressuring the GBP lower was lower than expected UK CPI for October (0.1% vs. 0.2% m/m expected). The next focus in the UK will come tonight with the release of the Bank of England’s inflation report.
The recent string of good US data continued overnight with retail sales for October expanding 0.5% (0.3% expected). The Empire manufacturing index for November beat expectations (0.61 vs. -2.0 expected). These data outturns, combined with a recovery in sentiment late this morning, has helped US equity markets rise and most currencies recoup some losses against the USD.
Looking to the night ahead, expect the focus to remain on the European debt crisis. On the data front, we have the Bank of England inflation report, Eurozone and US CPI, and US industrial production.
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Mike Burrowes is part of the BNZ research team.
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