Nervousness on global growth and more cautious risk sentiment may continue to underpin the USD

By Mike Jones

NZD

After starting the week on the front foot, the NZD has suffered a sharp fall from grace over the past 24 hours. From around 0.8260 this time yesterday, the NZD/USD has shed around a cent amid rising worries about the strength of Chinese demand.

Headlines from BHP Billiton yesterday that iron ore demand has slowed to “single digits” kick-started the NZD and AUD selling. The AUD/USD skidded ½ lower to 1.0570, dragging the NZD/USD off to around 0.8240.

Overnight, markets really began to lose their nerve. Chatter about unrest and a possible coup in Beijing, while subsequently dispelled, took a further toll on sentiment. Global equity markets dipped into the red and commodity prices lost ground. Oil prices are down over 2%.

Rising risk aversion and softening commodity prices saw leveraged and speculative accounts exit long positions in the NZD and AUD. NZD/JPY skidded from above 68.50 to closer to 68.00, helping drag the NZD/USD down to an overnight low of around 0.8160.

This morning’s Global Dairy Trade milk price auction didn’t do NZD sentiment any favours. Milk prices fell 4.5%, their fourth straight decline.

It’s worth noting, slowing Chinese demand for commodities should not really be “news”. Indeed, we heard last week that the China Iron and Steel Association has revised down its 2012 output growth forecast to 4%. Still, recent AUD and NZD price action provide a timely reminder of how sensitive these currencies are to slowing Chinese growth and commodity price declines.

Today’s Q4 Balance of Payments figures should reveal a decent reduction in the annual current account deficit. We’re expecting a fall to 3.9% of GDP, from 4.3% in Q3 (the market expects 4.0%). A result around our forecast would be viewed as positive and hence could provide some support for the NZD on the day.

However, global risk appetite and USD sentiment will remain the bigger drivers of the NZD in the short-term. Should the market remain in risk aversion mode (watch the performance of Asian equity markets today for clues), we could see further declines in the NZD/USD today. Solid support is expected around the 200 day moving average at 0.8090. Local migration and credit card spending statistics (both for February) will also be released today. However, these should be of little interest to the NZD.

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Majors

The week’s early decline in the USD was arrested overnight thanks to a modest increase in risk aversion. From around 79.50, the USD index ground up to an overnight high a touch above 79.80.

Worries about slowing Chinese demand (see NZD section) have cast a pall over market sentiment in the past 24 hours. Risk aversion gauges such as the VIX index are generally a little higher. European equity indices notched up losses between 1.1-1.4%, following a weak lead from Asia (the Shanghai composite index slipped 1.4% yesterday). US stocks fared a little better; the S&P500 is currently down around 0.4%.

Commodity markets also suffered from the less optimistic global growth sentiment. The CRB index (a broad index of global commodity prices) is down 1%. A 2.3% slide in oil prices (to US$106/barrel) led the commodity declines amid news of increasing Saudi Arabian supply and more Iranian tensions.

Sliding global equity markets and weakening risk appetite did spur demand for ‘safe-haven’ currencies like the USD and JPY. But it was only really the NZD and AUD that bore the brunt of the firmer USD and JPY. The major currencies - EUR, GBP, and JPY - were relatively unmoved.

The GBP found some brief support from surprisingly strong UK inflation data. Consumer prices rose by 0.6% in February, more than reversing January’s 0.5% fall (0.4% expected). In response, markets reduced the odds of further Bank of England quantitative easing, underpinning the GBP/USD’s brief climb to 1.5880.

Looking ahead, creeping nervousness on global growth and more cautious risk sentiment may continue to underpin the USD in the short-term. In addition, US Treasury yields continue to press slowly higher, providing the USD with yield support. US 10-year Treasury yields, at 2.38%, are now some 40bps above end-February levels. Solid support on the USD index is eyed towards 79.20, with initial resistance at 80.50. Minneapolis Fed President Kocherlakota is speaking this morning, so keep an eye on the newswires. 

All its research is available here.