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Better US data and good demand at a Spanish bond auction prompts reversal in risk appetite

Better US data and good demand at a Spanish bond auction prompts reversal in risk appetite

By Mike Burrowes


The NZD/USD has recovered the losses suffered yesterday, rising steadily from 0.7470 to 0.7540 currently. The move was higher spurred by better data updates in Europe and the US, and sold demand at a Spanish bond auction.

Yesterday’s BNZ PMI for November fell further into contraction (45.7, 46.5 previously). Does this mean NZ’s manufacturing sector is heading into another recessionary phase? Well, possibly, but not probably, in our view. For a start, even with the contraction the PMI points to for the sector in the December quarter, manufacturing would still be well up on a year ago.

This is aided by the hefty production gain we anticipate for the industry in next week’s Q3 GDP report. Specifically, we’re picking a 2.4% jump. This would set manufacturing output about 9% higher than the corresponding quarter last year. From this, a pause is not necessarily a bad thing. There was little reaction in the NZD to this.

The NZD/AUD made modest gains overnight, rising from 0.7550 to 0.7590 currently. The modest recovery in the cross over the past couple of days has been helped by several large option structures expiring. However, with the NZ-AU 3-year interest rate differential currently at -112bps, from -95bps a couple of weeks ago, expect any moved to the topside to be limited in the near-term.

It will be a quiet end to the week, with no data due for release on either side of the Tasman. On the day, initial support for NZD/USD is eyed at 0.7500 and resistance at 0.7600.


While concerns over a sharp slowing in European growth remain, overnight markets took some solace from better US data and good demand at a Spanish bond auction. The more encouraging developments saw nearly all the major currencies register decent gains against the USD.  

Further signs that growth in the US is picking up helped the S&P500 index and Euro Stoxx 50 index gain 0.8% and 0.9% respectively. The VIX index (proxy for risk aversion) dropped from 26.0 to 24.4.

The improvement in risk sentiment overnight led to USD selling, with the USD index falling 0.3% to 80.30. Expect this relationship to hold, even if it is better US data which is driving the risk on mood. Indeed, the US data was on net much better than expectations overnight. The Empire manufacturing survey for December came in at 9.53 (3.00 expected), the Philadelphia Federal business survey for December rose to 10.3 (5.0 expected), and the Current Account deficit for Q3 shrunk to $110.3b ($108.5b expected). The only disappointment was industrial production for November (-0.2% vs. 0.1% expected).

Trading in the EUR/USD has remained volatile overnight, trading within a 1.2960 to 1.3050 range. The bias within the range was to the topside, helped by Eurozone data coming in ahead of expectations. The PMI manufacturing for December recovered to 46.9 (46.0 expected), but still remains in contractionary territory. Markets were also encouraged by decent demand at a Spanish bond auction (see Fixed Interest comment).  

Comments from ECB President Draghi capped the moves higher in the EUR. Draghi noted that “intensified financial market tensions continue to dampen activity in the Eurozone and the outlook remains subject to high uncertainty and substantial downside risks”. The EU’s Van Rompy noted he will convene a meeting of EU leaders in late January or early February. What will the next big plan be?

The GBP/USD is only marginally higher, currently trading around 1.5490. UK retail sales were a mixed bag and had something in it for everyone. UK retail sales were weaker-than-expected at -0.7%m/m (-0.4% expected), but backwards revision meant the y/y number was better than expectations.   

Looking to the day ahead, in Europe we have the release of the Eurozone trade balance. In the US, the focus will be on whether CPI for November can move positive after falling 0.1% last month.

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Mike Burrowes is part of the BNZ research team. 

All its research is available here.

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