By Mike Jones
NZD
The NZD/USD lost a little more of its lustre overnight as investors’ initial relief over the Greek bailout deal faded into disappointment.
Still, a late bounce in US stocks helped limit the downside to around 0.8200. So the 0.8145-0.8250 range remains firmly intact.
Notably, one-month NZD/USD implied volatility has now fallen to 15-year lows, suggesting (options) traders don’t expect recent ranges to break before Christmas.
Yesterday’s RBNZ inflation expectations survey produced the expected moderation in the key 2-year ahead measure, to 2.27% from 2.32%.
A step in the right direction, but still above the RBNZ’s 2.0% annual CPI mid-point that’s explicit in the new PTA. While not a reason for the RBNZ to hike, it presents something of a barrier to cutting further.
We note that RBNZ rate cut expectations for the year ahead, as implied by OIS pricing, have stabilised at around 15-20bps recently. This has prevented further erosion of the NZD/USD’s yield appeal.
NZ-US 3-year swap differentials have been steady around 220bps-230bps over the past two months, contributing to the sideways range in the currency.
The reaction in European markets to the Eurogroup’s agreement on a Greek bailout deal was a little cold (see Majors).
European equities sold off and the NZD/USD was dragged lower in sympathy with a ½ cent fall in the EUR/USD. However, some of this gloom lifted following more encouraging news out of the US economy this morning. A late bounce in US stocks ensured the NZD/USD’s probe below 0.8200 was brief.
This all sets the NZD/USD for another day of consolidation inside the familiar 0.8145-0.8250 range. This is particularly so given there is only second tier data on the calendar (AU construction work, US home sales, and the Fed’s Beige Book).
However, watch out for any headlines out of RBNZ Governor Wheeler’s 10:15am appearance before Parliament’s Finance and Expenditure Committee. He’ll be giving testimony on the Reserve Bank’s Annual Report.
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Majors
Buy the rumour, sell the fact. That’s been the broad market reaction to yesterday’s announcement of a Greek aid deal. Led by a ½ cent decline in the EUR/USD, most of the major currencies have surrendered the knee-jerk gains made in yesterday afternoon’s post-deal euphoria.
The deal certainly represents progress. But it looks as if uncertainty over implementation (the approval of seven national parliaments is needed, including Germany), its conditional nature, and its dependency on a Greek debt buy-back (scheduled for 12 December) has taken some of the gloss off for investors.
So after a knee-jerk bounce above 1.3000, the EUR/USD has slipped back to around 1.2940 in offshore trade. European currencies more broadly have all underperformed. The GBP is a notable exception after Q3 UK GDP growth was reconfirmed at 1.0%q/q.
The OECD’s slashing of their global growth forecasts added to the more gloomy tone. The OECD now expects the global economy to grow 2.9% this year (compared to 3.4% in May) and 3.4% in 2013 (previously 4.2%).
However, we note that this essentially brings the OECD into line with what most other forecasters were already expecting. We forecast global growth of 3.3% next year.
Currencies bounced off their lows late in the New York session as more encouraging US data helped shore up risk appetite.
October durable goods orders outstripped expectations and November US consumer confidence hit the highest level in a 4½ years (73.7 vs. 73.0 expected).
US stocks climbed out of the red to around flat, and the VIX index (a proxy for risk aversion) fell back to recent lows around 15.00.
Looking ahead, we retain an optimistic view. The Greek news is sufficient to buttress sentiment without leading to unwarranted euphoria, but as and when the various parliaments pass the deal and the disbursement is assured for December 13, we suspect risk sentiment will take another modest leg up – assuming the fiscal cliff negotiations haven’t hit a road block.
Given this, we believe dips in the EUR/USD will be remain fairly shallow in the short-term. Support at 1.2875 should continue to hold.
Other News:
*NZ merchandise trade data for October confirms that the nation’s external accounts are deteriorating (trade deficit NZ$718m vs. $450m expected). Exports fall 10.9%y/y thanks to lower commodity prices. Further deterioration is expected.
Event Calendar:
28 November: AU construction work; US new home sales; US Fed's Beige Book; 29 November: NZ ANZ business confidence; EU German unemployment; US GDP; US pending home sales; 30 November: NZ building permits; JN jobless rate; EU German retail sales; US personal income; US Chicago PMI; 1 December: CH manufacturing PMI.
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