Comments from Fitch and Moody's suggest they willl look at Euro sovereign downgrades; NZ$ loses a cent against US$

By Mike Burrowes

NZD

A bout of risk aversion has seen NZD/USD shed almost 1 cent to 0.7620 currently. The focus overnight was on comments from Moody’s and Fitch, both noting that sovereign ratings for the major European economies are under review. While there has been some ongoing domestic and Asian demand in our NZD flows the market has been driven by custodial names selling the currency.

Trading on the NZD against the GBP and EUR was mixed overnight. NZD/GBP gradually fell through the evening, falling from 0.4940 to 0.4890. The NZD/EUR faired better and is broadly unchanged at 0.5780 over the past 24 hours.

The NZD/AUD has continued to probe support at 0.7550. The weakness in the cross over the 24 hours was despite a softer October trade update from Australia yesterday ($1595m vs. $2000m expected). The only data due for release in Australia today is the NAB business confidence survey and Manpower survey.

We only have some second-tier data due for release locally, so expect the NZD to take its cues from offshore. In terms of the data, we have the NZ monthly food price index and Manpower survey due for release today.

Support on NZD/USD for the day ahead is eyed at 0.7600 and resistance at 0.7680.

Majors

The lukewarm reaction to Friday’s EU plan turned cold overnight. Markets focused on comments from ratings agency Moody’s and Fitch, both suggesting they will look to downgrade the ratings of the major European economies. This saw “safe haven” demand for the USD and JPY, while the AUD and NZD were among the weakest performers.

The poor sentiment was reflected in equity markets, with the S&P500 index and Euro Stoxx 50 index shedding 2.0% and 3.1% respectively. The VIX index (proxy for risk aversion) jumped from 26.5 to 27.5.

The EUR/USD dribbled lower throughout the evening, falling from 1.3340 to around 1.3200 currently. Sentiment towards the EUR was knocked by the news Moody’s will review its ratings for European economies. Rating agency Fitch also chimed into the debate, noting the EU plan did not “offer a comprehensive solution to the crisis…increases short-term pressure on Eurozone ratings”

Further dampening sentiment was comments from the German coalition party, noting they would not support a parliamentary vote on funding the IMF through the Bundesbank. In addition, Bundesbank President Weidmann told media that while the accord to limit budget deficits represents progress the onus is on governments rather than the ECB to resolve the crisis. With no new support from the EU or the ECB on offer, Italian 10-year bond yields spiked 20bps higher to 6.56% overnight.

In the backdrop of heightened risk aversion, the USD appreciated against all of the major currencies. This saw the USD index rally 1% to 79.50. The mood towards US equities was not helped by news that Intel had cut its earnings outlook. The “safe haven” JPY gained against all the major currencies, except the USD. The USD/JPY rose from 77.60 to 77.90 currently.

Looking to the day ahead, we have CPI releases for France and the UK. Expect the ZEW survey for the Eurozone to come off further, given recent developments. In the US, first up we have retails sales and then the FOMC rate decision at 8:15am NZT.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.