Markets taking a breather from volatility as US breaks for Thanksgiving

Markets taking a breather from volatility as US breaks for Thanksgiving

By Mike Burrrowes

NZD

The NZD/USD paused for breather overnight, trading within a tight 0.7390 to 0.7450 range. Expect trading in FX markets to remain subdued over the next 24 hours as there is no major data due for release globally. Headlines from Europe are the major wildcard.

The $282m October monthly trade deficit was smaller than the $450m deficit the market anticipated. This was the result of both exports coming in a tad stronger and imports mildly undershooting the market pick.  We take the still strongly positive annual growth in total exports and total imports as indicative of an economy still pushing forward. Much judgement is required in translating the monthly nominal trade data into meaningful indicators for real GDP, but nothing jumps out here to change of view for robust GDP growth in Q4.

The NZD/AUD spent most of the evening flirting with the 0.7600 level, currently 0.7620. If the NZ-AU 3-year interest rate differential is maintained at its current level of -95bps, it suggests the cross should be trading above 0.7800.

Trading in the NZD against the EUR and GBP was very boring. NZD/EUR spent the evening bobbing around in a 0.5540 to 0.5570 range. NZD/GBP traded within a tight range of 0.4770 to 0.4800.

Looking to the day ahead, expect trading in NZD/USD to remain subdued as there is no data due for release in either NZ or Australia. Initial support on NZD/USD is seen at 0.7380 and resistance at 0.7450.  

Majors

Markets have used the opportunity of a US holiday to take a breather. This has seen most of the major currencies either remain unchanged or make very modest gains against the USD. The USD index fell to 78.70 during the evening, but has recovered to be unchanged over the past 24 hours at 79.10.

EUR/USD started the evening on a positive note after the release of better-than-expected Eurozone data, rising from 1.3370 to an overnight high around 1.3410. The German IFO for November beat expectations (106.6 vs. 105.2 expected) and German GDP for Q3 was inline with expectations at 0.5%q/q.

The move higher in EUR/USD was short lived after some disappointing comments around the issuance of Eurobonds. German Chancellor Merkel noted the conditions are not right for a Eurobond and she is standing firm against the idea. One has to wonder what the right conditions are! At the same time, Merkel and Sarkozy noted they will issue Treaty change proposals before the 9-10 December EU summit. The changes will impose greater fiscal discipline on Eurozone countries. Following Merkel’s comments EUR/USD fell below 1.3320, currently 1.3340.

The ECB announced overnight that it was considering offering liquidity beyond the end of 2012. That's supportive in one sense for the banking system. However, it suggests the ECB remains resistant to being a lender of last resort vis a vis bond buying, so it’s negative in that sense.

The Greek Prime Minister Papademos announced that conservative party’s letter to EU was “satisfactory”. This suggests EU Finance Ministers will rubber stamp Greece's €8b aid tranche at their meeting on Monday - potentially the first real bit of positive news in a while. The Troika (EU/ECB/IMF) will return to Greece 12 December, after the next aid payment is made.

The GBP has struggled against the USD overnight, falling from 1.5540 to below 1.5500 currently. Comments from the Bank of England’s Miles weighed on sentiment, noting the Bank could do more quantitative easing if needed. It seems most members are open to further QE if growth remains weak and inflation falls sharply over the next 12 months. Data outturns were on balance weaker-than-expected. UK exports for Q3 fell 1% (-0.8%q/q expected) and imports rose just 0.3% (0.7%q/q expected). The second reading of UK GDP for Q3 was inline with expectations at 0.5%q/q.

Looking to the night ahead, expect a quiet end to the week with no data out in Europe or the US. The only wildcard will be headlines from Europe.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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