by Mike Jones
NZD
After marching higher yesterday morning, the NZD/USD spent last night consolidating in a 0.7600-0.7645 range.
With US markets closed for a holiday and little in the way of fresh news or events, currency markets struggled a little for direction overnight.
Eventually it came from Spain, which once again entered the limelight for all the wrong reasons. News reports focused on Spain’s intention to use government debt to prop up the troubled Bankia.
The combination of soaring Spanish government bond yields and sliding Spanish stocks soon put the kibosh on yesterday morning’s recovery in risk appetite.
As a consequence, the EUR/USD shed almost all of yesterday morning’s gains. The NZD/USD was also dragged off its overnight highs around 0.7640.
However, steady NZD/EUR and NZD/GBP demand helped limited the NZD’s losses. NZD/EUR is now around 2.5% above last week’s 0.5900 lows. We look for a sustained climb back towards 0.6200 in time.
It’s worth noting, after three weeks of steady NZD declines, bargain hunting exporters emerged from the woodwork last week.
Net NZD buying amongst our corporate client base was in the 97th percentile. In other words, over the past two years, net flows have been above this level only 3% of the time. Net NZD buying was broad-based, but particularly notable against the JPY and EUR. We suspect NZD/USD dips back towards 0.7500 and
NZD/EUR dips below 0.5950 would attract more buying from corporate and real money accounts.
Looking ahead, there is no local data of note until tomorrow’s building permits. It looks to be a similarly quiet day across the Tasman.
Japanese unemployment data at 11:30am (NZT) may garner some interest (4.5% jobless rate expected).
For today, NZD/USD support is eyed around 0.7520. Resistance will continue to found on bounces above 0.7650.
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Majors
It’s been a fairly listless start to the week in currency markets, in part thanks to the Memorial Day holiday in the US. After starting the week on the back foot, the USD clawed back most of its losses as the night wore on.
Monday morning’s advance in risk assets didn’t take long to fade. A fresh wave of negative press reports about the Spanish banking sector saw a familiar gloom descent on markets, halting the rally in the EUR and risk currencies.
Stocks in Spanish bank Bankia resumed trading (after its €19b bailout request) and opened down almost 27% (the broader IBEX index fell 2.2%). Meanwhile, Spanish bond spreads widened out to fresh highs, indicative of mounting solvency concerns. The 10-year Spanish/German bond spread hit 510bps (Spanish 10-year yields climbed to 6.5%).
After briefly climbing above 1.2620, the EUR/USD skidded back to around 1.2540. The AUD/USD and NZD/USD were dragged off their overnight highs in sympathy.
Still, it was the GBP that took the prize for weakest performer. Bank of England official Broadbent hinted a rate cut was possible if Europe continues to deteriorate (markets are factoring in just a 10% chance of such). In response, GBP/USD dribbled off from above 1.5710 to around 1.5680.
There has been a lot of chatter about how Spain is going to recapitalise Bankia (and other banks that may follow in its wake) recently.
Media reports overnight suggested the ECB has no qualms with Spain’s plan to issue government debt to Bankia in exchange for equity, with the debt then repo’d to the ECB in return for cash. In effect, the Spanish sovereign would be borrowing (admittedly indirectly) from the ECB.
The news was initially taken as encouraging, but the Spanish PM has subsequently said no discussions with the ECB have taken place. This is an issue to watch.
Looking ahead, there is only second tier data on the calendar over the coming 24 hours. As a result, more consolidation looks likely. We may get more excitement later in the week, with a slew of important US data due including the ISM manufacturing index and non-farm payrolls on Friday.
We suspect this week’s US data will remain indicative of modest US growth. This should add to the downward pressure on the EUR/USD. Strong selling interest should be encountered on rallies towards 1.2680.
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