Failed German bond auction and a futher rating agency warning on France send safe haven currencies higher

Failed German bond auction and a futher rating agency warning on France send safe haven currencies higher

By Mike Burrrowes

NZD

The NZD/USD fell to its lowest level since late March this year, after a German bond auction failed to attract sufficient investor demand and Moody’s warned France could loose its AAA rating. NZD/USD fell from 0.7450 yesterday afternoon to a low around 0.7390, currently 0.7400. Despite some steady demand to buy NZD from exporters over the past 24-hours, macro and short-term trading accounts had stronger appetite to pare long positions.

Outsized moves in the AUD over the past 24-hours have made an impact on NZD/AUD. The cross sustained a move past its recent top at 0.7600, trading at 0.7640 currently. In a risk adverse environment, the cross will likely test the 0.7700 level – unless NZ specific news upset.

The NZD made some modest gains against the EUR and GBP overnight. NZD/EUR is slightly higher at 0.5550, from 0.5530 yesterday. NZD/GBP is currently trading around 0.4770, marginally higher since yesterday afternoon.

Looking to the day ahead, will today’s local merchandise trade figures really matter? We’re looking for a largely seasonal deficit for October of $422m, comprising steady annual growth in exports and imports individually.  The Australian calendar is bare and the desks of New York are thinning out for the Thanksgiving holiday.

Majors

Risk appetite deteriorated further overnight after a German bond auction attracted limited investor demand. This saw the EUR decline sharply and dragged other risk sensitive currencies lower. The USD and JPY have benefited from strong “safe haven” flows.  

The ongoing concerns over Europe saw the S&P500 index and Euro Stoxx 50 index shed 1.7% and 1.9% respectively. Our risk appetite index (scale 0 – 100%) has fallen from 29.7% to 29.0%, but is still above the most recent low around 24% in early October. The CRB index (broad index of global commodity prices) fell over 1%.

The EUR/USD plunged below 1.3330 early this morning, its lowest level since early October. The declines in the EUR began after a German auction of 10-year bonds failed to sell the allotted €6b on offer. This was taken by the market as yet another sign the debt crisis is spreading into the core European economies. Rating agency Fitch added to the risk-off move. It suggested France had limited room left to absorb shocks to its finances, like a new downturn in growth or support for its banks, without risking its AAA status.

Further dampening sentiment towards the EUR was Eurozone industrial new orders for September (-6.4% vs. -2.7%m/m expected). This is the biggest decline since December 2008, following the collapse of Lehman Brothers investment bank. Eurozone PMI manufacturing data for November did little to help the mood (46.4 vs. 46.5 expected).    

The GBP was one of the better performing currencies against the USD overnight, only falling around 1 cent to 1.5520 currently. The Bank of England minutes were slightly more hawkish, with all nine members voting to keep the asset purchase program at £275b. There was some expectation two BoE members would vote to increase the asset purchase program further. However, the minutes noted that further asset purchases may be warranted in due course.

In the backdrop of heightened risk aversion, the USD index benefited from strong “safe haven” flows. The USD index rose around 1% to 79.10. The USD eked out a small gain against the JPY, rising from 77.00 to 77.30 currently. The AUD/USD was one the worst performing currency over the past 24 hours, falling 1.2% to 0.9710 currently.  

Looking to the night ahead, expect trading to be thin with US markets on holiday for Thanksgiving. In Europe, we have the final Q3 German GDP outturn and the IFO survey for November. In the UK, we have the provisional Q3 GDP estimate. Watch out for headlines from a meeting between German Chancellor Merkel, French President Sarkozy and Italian Prime Minister Monti at 12.30 NZT tonight.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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