by Mike Jones
NZD
The NZD/USD continued to dribble lower overnight, carrying on this week’s downtrend. After starting the week around 0.8250, the currency now trades closer to 0.8130.
Currency markets struggled a bit for direction last night. Not only was there little in the way of market moving news and events, but investors were perhaps a little reluctant to take large positions ahead of the weekend’s looming G20/IMF/World Bank meetings.
Spanish and French debt auctions went ok, but a batch of weaker than expected US data and rumours of a French sovereign downgrade soon had investors ducking for cover again.
Global equity markets dipped into the red and our risk appetite index (scale 0-100%) declined from 57.6% to 56.1%. Against this backdrop, the NZD gave up a little more ground against the ‘safe-haven’ USD.
More of a toll was taken on NZD/GBP, which now trades at 3½ month lows around 0.5060. Sentiment towards the GBP has brightened noticeably this week as signs of sticky UK inflation have elicited less dovish chatter from the Bank of England. The market has pared back expectations of further BoE quantitative easing accordingly.
However, none of this has changed our view that debt, economic growth, and interest rate ‘fundamentals’ are likely to continue to favour the NZD over the GBP this year. Given this, we doubt NZD/GBP dips below 0.5000 will be sustained, and look for a push back towards 0.5200 in time.
The local calendar is relatively light to see out the week, though ongoing official commentary and sound bites are expected as we head into the weekend’s IMF and G20 meetings.
There’s also the weekend release of HSBC’s Flash update on the Chinese PMI to watch out for.
As we noted at the start of the week, a daily NZD/USD close below 0.8150 would pave the way for a test of pivotal support at 0.8090 (which is also the 200-day moving average).
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Majors
Nervousness continued to ripple through markets overnight. Equity markets notched up small losses, commodity prices fell, and bond yields edged lower.
Still, last night’s news was more noise than trend altering information. As a result, currency markets continued to do the sideways shuffle inside their recent ranges. The USD index tracked a narrow 79.40-79.80 range.
The much anticipated Spanish 10-year debt auction went off without a hitch (see Fixed Interest). As markets breathed a sigh of relief the EUR/USD was propelled from below 1.3100 to almost 1.3150.
However, it wasn’t long before sentiment began to worsen. Everyone’s favourite rumour – the French downgrade – did the rounds again, although ratings agency Fitch later affirmed France’s AAA rating.
US data was a little uninspiring, adding to the risk-off mood. US jobless claims, the Phillie Fed index, and existing home sales all undershot expectations slightly.
Sliding risk appetite and equity market weakness encouraged demand for the ‘safe-haven’ of the USD. Meantime, ‘growth-sensitive’ currencies like the AUD, CAD and NZD all underperformed, with the AUD/USD and NZD/USD heading towards the bottom of recent ranges.
Looking ahead, all eyes are on the weekend’s G20, IMF, and World Bank meetings. The focus for markets is on increasing firepower to deal with Europe’s debt crisis. To us, hopes of a €1t European firewall are perhaps a little optimistic. Something closer to €800b looks more realistic (via a possible raising of €400b to add to the existing €386b). Pledges so far add up to around an additional €320b.
On these numbers, we don’t believe the firewall would be large enough to shield Spain and Italy from further market fallout, which may provide some disappointment for markets on Monday’s open.
Against this backdrop, we wouldn’t be surprised to see the safe-haven USD remain in vogue in the short-term.
Solid support on the USD index is eyed on dips towards 79.20, with a push towards 80.00 looking increasingly likely in coming sessions.
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