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The risk sensitive A$, C$ and NZ$ were among the best performers, as markets responded positively to Euro summit news

Currencies
The risk sensitive A$, C$ and NZ$ were among the best performers, as markets responded positively to Euro summit news

By Mike Burrowes

NZD

The fortunes of NZD/USD were again determined by developments in Europe. The NZD/USD fell to an intra-day low around 0.7640 early in the evening as markets were disappointed the European Stability Mechanism would not have a banking licence (this prevents it from borrowing from the ECB). The currency spent the rest of the evening grinding back to 0.7750 as sentiment improved.

Friday’s NZ electronic transactions were always going to fall after the super-charged September/October period due to the Rugby World Cup. The fact that overall transactions only dipped 0.2% from the tournament induced surge is encouraging. It was stronger than the 1.2% decline we have pencilled in. The details were a bit more in line with our thinking with the retail component slipping 0.5% and core retailing down 1.3%. The data had little impact on the NZD.

Trading in the NZD against the EUR and GBP remained volatile on Friday. NZD/EUR fell to a low around 0.4890 during the early evening, before recovering to 0.4950 currently. It was similar on NZD/GBP, falling to 0.5740 and currently trading around 0.5790.

It’s a lighter local calendar this week, with none of the updates likely to leave a lasting impression on markets. We get an update on the local consumer today with Westpac’s Q4 Confidence update, the monthly food price index Tuesday and PMI update on Thursday. The PMI for October slipped below into contractionary territory (below 50) last month.

Majors

Risk sentiment recovered on Friday after European leaders announced a plan to build a closer fiscal union, although some investors remain sceptical given the lack of details in the plan. In this backdrop, “safe haven” demand for the USD and JPY waned. The risk sensitive AUD, CAD and NZD were among the best performers.

Equity markets liked the plan by European leaders to force tighter fiscal rules on all member countries. This helped the S&P500 index and Euro Stoxx 50 index gained 1.7% and 2.4% respectively. The improvement in risk sentiment saw the VIX index (proxy for risk aversion) plummets from 30.6 to 26.5.

The EUR/USD remained very volatile on Friday, trading within a 1.3280 to 1.3430 range. The currency was given a boost off the lows by news that EU leaders had agreed to fiscal integration and to boost funding for the European Stability Mechanism (see Fixed Interest section below). However, enthusiasm for the agreement was short-lived as markets focused on the lack of details in the plan. EUR/USD is currently trading around 1.3380.

Interestingly, an ECB official noted the ECB has capped its purchases of Eurozone sovereign bonds at €20b a week for now. Don’t expect the ECB to increase its purchases until the EU has a credible plan in place to stem the crisis. We are likely to get some follow up from rating agency S&P this week, after they warned last week that several major European economies could loose their AAA ratings.  

Debt auctions for Spain and Italy this week will provide an insight into investor appetite. Spain is selling 4 and 10 year debt and Italy is selling 1 and 5 year debt. If recent auctions are anything to go by, markets will be encouraged if they manage to get the allocated amount away.

US data outturns on Friday continue to suggest the US economy is stabilising. The University of Michigan consumer confidence survey for December beat expectations at 67.7 (65.8 expected). In addition, the trade deficit for November was smaller than expected (-43.5b vs. -43.9b expected). The USD index declined 0.3% to 78.6. The focus in the US this week will be the Federal Reserve meeting on Wednesday morning NZT. We expect the Fed will note that if the growth and unemployment situation does not improve it will ease monetary policy further.

The risk sensitive AUD and NZD continued to take their cues from developments offshore. The AUD/USD briefly fell to an intra-day low around 1.0050 before recovering to 1.0220 throughout the rest of the evening.

Looking to the week ahead, there are central bank meetings for the US, Norway and Switzerland. On the data front, in the UK we have CPI on Tuesday and retail sales on Thursday. In Europe, the focus will be on Eurozone CPI, employment data and PMI manufacturing all released on Thursday. In the US, we have CPI due on Friday.

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Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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