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Franco-German agreement on fiscal rules for Euro countries boosts risk appetite; markets expecting RBA to cut cash rate today

Franco-German agreement on fiscal rules for Euro countries boosts risk appetite; markets expecting RBA to cut cash rate today

By Mike Burrrowes

NZD

The NZD/USD moved higher overnight, after some choppiness yesterday. Improving risk sentiment given potential positive developments in the Eurozone (see below) saw the NZD rise along with its “risk sensitive peers. It climbed from around 0.7770 last evening to 0.7820 this morning.

With the broad improvement in global risk sentiment over the past fortnight, the NZD/USD is now almost 6% off its November lows. Global factors will continue to dominate moves in the NZD ahead of the RBNZ meeting on Thursday. At the meeting we expect the statement to acknowledge global uncertainty and potentially push out its implied rate hiking cycle. However, we expect a clear medium-term bias toward tightening to be maintained.

The NZD gave some ground relative to the AUD overnight, falling from a high of almost 0.7630 to trade around 0.7560 currently. Expect some volatility on the cross this week with central banks on both side of the Tasman announcing target rates. If the RBA remains on hold today, as our NAB colleagues expect, it will surprise the market that is pricing a cut. This would provide a near-term boost to the AUD relative to the NZD.

The NZD showed choppy, but largely range-bound trading against both the EUR and GBP, ending the night slightly higher relative to both. The NZD/GBP currently trades around 0.4990. The NZD/EUR trades above 0.5810.

There are no NZ data releases today. The key development to watch today will be the RBA announcement at 4.30pm, NZ time.

Majors

The USD was broadly weaker over the past 24-hours with all major currencies making modest gains. As risk appetite continued to tentatively improve, the AUD, NZD and CAD were amongst the best performers. The “safe haven” JPY and CHF showed the smallest gains relative to the USD.

Our risk appetite index (scale 0-100%) inched a little higher to 37.2%. Equity markets were buoyed by Italian PM Monti’s announcement of an €30b austerity plan that included a “multitude of sacrifices”. In addition, France and Germany said they had reached a comprehensive agreement on a new set of fiscal rules for the eurozone to be presented to the EU summit on Friday. World equities added to their largest weekly gain since March 2009. The Euro Stoxx 50 rose 1.15%. The S&P500 is currently up 1.00%.

In this backdrop the EUR/USD made steady gains. Eurozone PMI data were not far from expectation, showing both the services (47.5) and composite (47.0) indices remaining below the crucial ‘50’ expansion level. Eurozone retail sales data was slightly stronger than expected at 0.4%m/m (0.1% expected). Overnight, the EUR/USD climbed from 1.3400 to 1.3460. (Just prior to 8.00am NZ time the EUR plunged back to 1.3400. This came after rating agency S&P announced that Germany and five other triple-A rated sovereigns may be at risk of downgrade.)

By contrast, the USD index eased lower from 78.60 to 78.30. Its “safe haven” appealed was overlooked as risk sentiment crept higher. US data was a little disappointing, in contrast to recent trends. The ISM non-manufacturing came in at 52 (53.9 expected), and October factory orders fell 0.4%m/m (-0.3% expected).

The GBP was dragged up on the coat-tails of the EUR. It was also boosted by the UK services PMI that came in at 52.1 (50.5 expected), firmly in expansion territory. The GBP/USD climbed from 1.5600 to trade around 1.5670 currently.

The AUD/USD rose from 1.0220 to 1.0300 overnight, to be the strongest performer over the past 24-hours underpinned by the better risk sentiment. The key for the AUD today will be the RBA meeting. The market is pricing over 80% chance of a 25bp rate cut.  Our NAB colleagues, by contrast, expect the RBA to keep rates on hold. If their forecast transpires, the AUD will likely experience an upward boost. In addition, the Australian current account balance and net exports and government spending data will be released today.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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1 Comments

Truely this is the greatest Country on earth at the moment.  Interest rate hikes as the rest of the idiot world slips down the deprescionary curve.  We are BOOMING!  Building a brighter future, returning to surplus through growth not austerity, property is going up in value on very strong fundamental grounds, the agriculture sector is in great shape.  What can possibly make this country any better?