BNZ's risk index slips but still indicates strong appetite for risk by global investors

By Mike Jones

NZD

The NZD/USD has dribbled lower over the past 24 hours as investors have pared back a little of their risk appetite.

Helped by steady NZD/JPY selling, the NZD/USD has traded down to around 0.8350, from highs of 0.8380 yesterday afternoon.

European economic jitters were responsible for last night’s modest sell-off in ‘risk-sensitive’ assets like the NZD/USD. However, the moves were more about profit-taking than any change in the ‘fundamentals’.

Our risk appetite index shifted down a touch, but at 83.6% (long-run average 50%) still remains indicative of a strongly risk-seeking attitude amongst global investors.

The NZD/JPY has soared almost 14% since November, to 4-year highs above 73.00.

While the gains have matched our expectations to some extent, we suspect the NZD/JPY has gotten itself a little overstretched (on the JPY side). To us, the balance of risks are still skewed in favour of additional NZD/JPY appreciation, but we may see a near-term correction back towards 70.00 before the uptrend resumes.

The first piece of NZ economic data will be delivered today in the form of November building consents (10:45am NZT). Following October’s 1.5% dip, we’re looking for a reasonable increase to support our strong view of NZ construction activity. Australian retail sales (1:30pm NZT, +0.3%m/m expected) may also hold passing relevance for the NZD.

Near-term NZD/USD support is seen at 0.8280 with initial resistance at 0.8400.

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Majors

Creeping doubts about the strength of the European economies have seen markets maintain a more defensive tone in overnight trade.

Equity markets on both sides of the Atlantic have extended their losses to the tune of 0.2-0.6%, and the VIX index (a proxy for risk aversion) is a little higher.

Against this backdrop, the traditional ‘safe-haven’ currencies – the USD and JPY – are outperforming at the expense of the EUR, GBP, and CHF. Still, price action in currency markets remains fairly limited, reflecting low volumes and perhaps some trepidation ahead of the Thursday’s ECB meeting.

On the whole, last night’s slug of European data was disappointing. German factory orders underwhelmed in November (-1.8%m/m vs. -1.4% expected), Eurozone retail sales eked out just a 0.1%m/m gain (0.3% expected), and Eurozone unemployment rose to a fresh EU-era high of 11.8% (11.7% expected). Youth unemployment is now 23.7% in the Eurozone (and 56.5% in Spain and 57.6% in Greece). 

Adding fuel to the risk-off fire, everyone’s favourite rumour – that France will shortly suffer a sovereign ­downgrade – also did the rounds for a short time, before officials snuffed it out.

An absence of US-specific data or events meant that the downbeat mood in Europe soon spilled over into the New York session, generating a 0.5% decline in the S&P500 and modest selling of the European currencies.

EUR/USD lost its foothold above 1.3100 (currently 1.3070), but we suspect support around 1.3000 will hold in the lead up to the ECB meeting. While there is a chance of an ECB rate cut, ‘no change’ is the more likely outcome in our view.

Given that earlier EUR weakness was linked in large part to the revelation that the ECB had contemplated a rate cut at its last meeting, rates inaction this week could well provide additional support for the single currency.

There is very little on the global data calendar over the next 24 hours. Note the US earnings season begins today with Alcoa set to report after the New York close.

Event Calendar:

9 January: NZ building permits; AU retail sales; CH CPI, PPI, industrial production & retail sales;

10 January: NZ trade balance; NZ ANZ commodity prices; AU building approvals; UK BoE decision; EU ECB decision; US jobless claims; 

11 January: UK industrial production; US trade balance.

All its research is available here.