If U.S. don't come up with credible fiscal cliff solution sovereign credit rating will slip further

By Kymberly Martin

NZD

The NZD/USD found resistance at 0.8310 overnight before returning to trade at 0.8260.

As the results of the US election showed Obama re-elected to the White House, the USD was initially weaker, benefitting the NZD.

However, as the night progressed general risk appetite waned (see Majors). Demand for the ‘risk sensitive’ NZD eased and the NZD/USD slipped back to 0.8260. The NZD/USD remains close to the top of its 0.8100 to 8.350 trading range.

Domestic and global factors will be important for the currency today. The focus locally will be the release of employment data.

We expect the NZ unemployment rate to tick down to 6.6% from 6.8% previously. However the series is volatile and a tick up toward the psychologically important 7.0% level cannot be ruled out.

This would likely elicit the greater response from the NZD as the market would increase expectations of RBNZ rate cuts. The NZD/USD knee-jerk reaction would be to slump.

Globally, the key development will be intensifying debate regarding how to address the US ‘fiscal cliff’ that looms at the end of the year.

Protracted uncertainty will likely negatively impact risk appetite, potentially undermining demand for the NZD/USD.

The key for the NZD/AUD today will be the relative outcomes of employment data on either side of the Tasman. In contrast to our central forecast for a fall in the NZ unemployment rate, the AU equivalent is expected to tick up to 5.5%.

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Majors

The USD dipped intra-night but finished the night broadly stronger, to trade at 80.80 currently. The results of the US election were the main focus last night.

After Obama was re-elected to the White House the market quickly turned its focus to the real challenge ahead i.e. of addressing the US ‘fiscal cliff’ in coming months.

Rating agencies have been quick to reiterate that unless the US comes up with a credible long-term debt reduction plan the sovereign’s rating will slip.

The mood was also sobered by coverage of riots in Greece ahead of the government’s vote on austerity measures needed to receive its next aid package.

Equities declined as our risk appetite index (scale 0-100%) slipped from 70% to 66%. The Euro Stoxx 50 closed down 2.20%, while the S&P500 is currently down a similar amount.

In this backdrop the USD initially slipped before benefitting from general ‘safe haven’ demand.

By contrast, the EUR/USD failed to hold onto early gains, falling from above 1.2860 to 1.2760 currently. This is its lowest level since mid-September.

In this environment the JPY was the clear out-performer. It took on its mantle as a ‘safe haven’ currency and benefited by being far from the epicentre of US and Eurozone concerns overnight. The USD/JPY fell from 80.40 to 79.90.

The AUD/USD appeared to take the night’s developments in its stride. However, it found resistance at 1.0480 before drifting back to sit at 1.0420.

The key for the currency today will be the AU employment data. The expectation is for a still soft labour market with the unemployment rate ticking up to 5.5%.

Tonight, market debate will likely continue to focus on the US ‘fiscal cliff’. The BoE and ECB also meet to set target rates. Both are expected to keep rates on hold, though some debate still reigns on whether the BoE will announce further QE.

Event Calendar:

8 November: NZ HLFS; JN Current account; NZ consumer confidence; AU employment; UK BoE meeting; EU ECB meeting; 9 November: NZ ECT data; CH data slug; EU finance ministers seek agreement on 2013 EU budget.

All its research is available here.