By Mike Jones
NZD
Negative news on both the domestic and global economies has spelled double-trouble for the NZD over the past 24 hours. The upshot is that the NZD/USD has lost just under a cent, to trade around 0.8080 currently.
Yesterday’s disappointing NZ GDP figures (0.3% vs. 0.6% expected by BNZ and the market) had no lasting effect on the currency. Sure, the immediate aftermath saw the NZD/USD shed around ½ cent. But it wasn’t long before the currency was tracking higher again, perhaps reflecting the fact a number of timing issues made the GDP slowdown look worse than it really was.
The surprisingly weak HSBC Chinese Flash PMI proved to be the real kicker for the NZD. The fall from 49.6 to 48.1 put the index at the weakest level since November 2011.
At a time when investors were already fretting about a sharp Chinese slowdown, the data simply added fuel to the fire. A heavy toll was taken on growth-sensitive, commodity linked currencies like the NZD and AUD. The AUD/USD tumbled ¾ cent to below 1.0400, with the NZD/USD dragged lower in its wake.
Overnight, the news on the global economy got even worse. European manufacturing and services PMIs were nothing short of terrible (see Majors).
US data printed ok, but risk aversion had already set it. Global equity markets fell 0.6 - 1.6%, and our risk appetite index (scale of 0 - 100%) declined from around 70% to 67.7%.
Against this backdrop, investors flocked back into ‘safe-haven’ currencies like the JPY and USD, at the expense of the NZD and AUD. NZD/JPY plunged from 68.00 this time yesterday to around 66.80, and the NZD/USD ended the night below 0.8100.
Looking ahead, it’s hard to see a near-term circuit breaker to the current bout of global growth worries. As a result, easing risk appetite and concerns about Chinese growth are likely to keep the NZD/USD heavy.
In the short-term, we doubt bounces above 0.8160 will be sustained.
There is no NZ data on the calendar today, but keep an eye out for this afternoon’s Chinese Leading Economic Index.
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Majors
A bevy of bad news on the global economy sent markets into a tailspin overnight. Risk aversion has been the dominant theme in currency markets. As a result, the ‘safe-haven’ USD and JPY have surged higher.
The rot began in Asia yesterday with the release of the decidedly weak HSBC Chinese PMI. With worries about slowing Chinese growth already front brain for markets, the data simply accelerated investors’ flight to safety.
Asian stocks dipped into the red, commodity prices backpedalled and demand for the ‘safe-haven’ USD and JPY began to pick up.
A batch of terrible looking European PMI figures saw the mood worsen. Contrary to analyst expectations for an improvement in the PMIs, the composite (manufacturing + services) European PMI fell deeper into contractionary territory (48.7 vs. 49.6 expected).
The supposedly powerhouse French and German manufacturing sectors led the declines (German PMI 48.1 vs. 51.0 expected). Rounding off an uninspiring night, Irish GDP confirmed the nation has entered recession (-0.2%q/q vs. 1.0% expected).
European stocks slid between 0.8-1.6% and the VIX index (a proxy for risk aversion) jumped from 15 to almost 16.5.
The knee-jerk reaction was to sell the EUR, but it wasn’t long before a more general flight to safety saw the USD and JPY push higher against all of the majors.
From above 1.3240, the EUR/USD finished the night closer to 1.3180. The GBP/USD fell around ½ cent to 1.5820 and a full cent was shaved off the AUD/USD (to trade around 1.0380).
USD/JPY tumbled from 83.40 to almost 82.40. Not only did general risk aversion underpin the JPY, but yesterday’s solid trade figures questioned the idea Japan’s external accounts are in awful shape. Indeed the trade balance posted a surprise ¥33b surplus (¥120b deficit expected).
To us, Chinese economic activity still looks to be consistent with a ‘soft landing’. However, the risks of a sharper slowdown appear to be picking up and, in any case, it will be some time before a clearer picture of Chinese growth emerges. As such, markets may well remain on the defensive in the short-term, bolstering USD demand. Dips towards 79.30 on the USD index are expected to be met with solid support.
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