by Mike Jones
NZD
After stabilising yesterday, the NZD resumed its decline overnight. A clear deterioration in global risk sentiment saw the NZD/USD slide from 0.7940 to 4-month lows around 0.7880.
European political turmoil knocked back global risk appetite overnight. Greece is no closer to forming a government, and the risk is growing the new government rejects EU-IMF enforced austerity. Spain also remains in the spotlight for all the wrong reasons, and the shape of the new French government is still uncertain.
Global equity markets notched up decent losses and our risk appetite index (scale 0-100%) slipped from 57.6% to 56.0%. Global commodity prices also continued to slide – the CRB index fell 0.7% overnight, to be down a sizeable 4.2% for the month to date.
Against this backdrop, investors’ shunned the NZD in favour of the relative ‘safe-haven’ of the USD and JPY.
It’s worth noting, we’ve not yet changed our fundamental NZD view in the wake of the recent falls. For some time, we’ve been warning of the risk that falling NZ commodity prices begin to undermine the currency. Last week, the CBA NZ commodity price index fell a further 1.1%, and the monthly ANZ index tumbled 4.5% in April.
Depending on which measure you look at, NZ commodity prices are now 15-17% below their 2011 highs.
Catalysed by softening global risk sentiment, these commodity price falls are finally starting to be reflected in the currency.
Looking ahead, rising global risk aversion and extremely low local interest rates may keep the NZD a little heavy in the short-term.
Momentum and technical factors are also conspiring against the currency (our momentum model is short NZD/USD from 0.8117). However, we don’t believe the NZ economic recovery is dead and we don’t believe the RBNZ will deliver on the 33bps of OCR cuts currently priced into local interest rate markets.
If we’re right, we should see support for the NZD open up before too much longer. The next key support level for the NZD/USD is sighted around 0.7780.
Look out for this morning’s RBNZ Financial Stability Report, due 9am (NZT). Its financial system assessment is unlikely to be market moving. But any intimations regarding the macro-economy could be important for a market now pricing OCR cuts. The still-high NZD may also come in for another lashing, despite the recent falls.
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Majors
Risk aversion again descended on markets overnight. As a result, the ‘safe-haven’ JPY and USD outperformed at the expense of ‘growth-sensitive’ currencies like the AUD, NZD, and CAD.
Fears about a Greek exit from the Eurozone are intensifying. Not only is time running out for Greek political parties to form a government, but the risk is growing the new government will ditch austerity measures and renege on the latest EU-IMF bailout deal. Meantime, whispers Spain is preparing to bailout some of its banks saw 10-year Spanish government bond yields head back up towards 6%.
Rising Eurozone worries took a clear toll on investors’ risk appetite. Global equity markets fell 1-2.8%, commodity prices lost ground (the CRB index is off around 0.7%), and global bond yields plumbed multi-month lows.
The VIX index (a proxy for risk aversion) leapt from below 19% to above 20.5%.
The fallout on the EUR/USD was surprisingly modest. The single-currency simply drifted off from 1.3050 to briefly poke its nose below 1.3000. Solid looking German industrial production figures (2.8%m/m vs. 0.8% expected) likely helped EUR sentiment. Instead of the EUR, it was the ‘commodity currencies’ that bore most of the brunt of the ‘risk-off’ mood.
The AUD, NZD, and CAD notched up losses of 0.5-0.8% against the firmer USD.
Market reaction to last night’s Australian Budget was muted. An A$1.5b surplus was projected for 2012-13 as expected. However, given the A$44b deficit starting point, achieving this projection represents a significant fiscal tightening. In fact, it would be more than double the previous largest Australian fiscal contraction.
Of course, this tightening will be offset to some extent by RBA monetary easing, but it is nonetheless a negative factor for the AUD going forward.
Looking ahead, the global data calendar is largely empty ahead of Thursday’s Australian employment data. As such, sentiment towards the Eurozone and global equity market performance will likely drive currencies in the short-term. For today, rising risk aversion and equity market weakness should keep the USD index supported on any dips towards 79.50.
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