By Mike Burrrowes
Further concerns over the state of several large European economies has seen risk aversion rise overnight. In this backdrop, NZD/USD was the worst performing currency, plummeting from 0.7670 to around 0.7570 currently. The next key target for NZD/USD on the downside is the 0.7470 low reached at the beginning of October.
The weakness in NZD/USD over the past couple of days was exacerbated by a sharp decline in NZ interest rates as the market moved to price a rate cut from the RBNZ. The NZ-US 3 year interest rate differential is currently 2.09%, from 2.39% at the beginning of the week. If this differential is sustained then it suggests the risks are skewed to further declines in NZD/USD.
The fall in NZ interest rates has seen our NZD/USD “fair value” range fall almost 1 ½ cents over the past week to 0.7000 to 0.7200. While we do not expect the RBNZ to cut rates, it’s hard to see current expectations for a RBNZ rate cut reversed until the European debt crisis stabilises.
The NZD lost ground against the EUR and GBP over the past 24 hours. NZD/EUR fell steadily throughout the evening from 0.5680 to around 0.5630 currently. The price action in NZD/GBP was similar, falling from 0.4870 to just above 0.4800.
There are no local data released due for release in either NZ or Australia. The NZD will likely continue to take its cue from the various twists and turns in the European debt crisis. On the day, support is seen at 0.7500 and resistance at 0.7620.
Ongoing concerns over very high bond yields in Spain and Italy has seen risk appetite decline overnight. Despite a decline in risk appetite, the moves in FX markets have been more mixed. The EUR/USD and GBP/USD are broadly unchanged, while the risk sensitive NZD and AUD have suffered heavy losses against the USD.
Rising risk aversion saw most other asset classes suffer losses. The S&P500 index and Euro Stoxx 50 index shed 2.1% and 1.1% respectively. Our risk appetite index (scale 0 – 100%) fell to 30%, but is some way off the late September low below 24%. Commodity prices have suffered heavier losses, with the CRB index (broad index of global commodity prices) falling 2.6%.
The moves in the EUR over the past 24 hours have been choppy. EUR/USD recovered from yesterday’s lows around 1.3420 to be just above 1.3530, but fell back early this morning to 1.3470. Sentiment towards the EUR was buoyed by comments from the new Italian Prime Minister Monti, pledging to implement reforms to restore investor confidence. But early this morning, rating agency Fitch noted that Italy’s credit rating could be cut to low investment grade.
The EUR suffered losses earlier in the evening after poor auction results from both France and Spain. These auction results highlight that the European debt crisis is shifting from the smaller to the ‘core’ economies.
The GBP posted steady gains throughout the evening, rising from 1.5710 to 1.5750 currently. Sentiment towards the GBP was bolstered by better-than-expected UK retail sales for October (excluding autos 0.6% vs. -0.3%m/m expected). Despite the better data, the consensus view is for UK growth to decline further and the Bank of England to undertake further asset purchases.
Despite the rise in risk aversion, the USD index is broadly unchanged over the past 24 hours. US data had limited impact on FX markets. Initial jobless claims were better-than-expected for the week ending 12 November (388k vs. 395k expected), while the Philadelphia Federal business outlook survey for November was weaker-than-expected (3.6 vs. 9.0 expected).
It’s a quiet end to the data week, with only CPI in Canada and US leading indicators due for release. Expect more focus around how EU leaders plan to stem the debt crisis from engulfing the entire Eurozone.
Mike Burrowes is part of the BNZ research team.