Markets focused on the Middle-East; emerging market issues still unfolding; focus off tapering

by Kymberly Martin

The NZD was amongst the weakest performers overnight as risk aversion dominated markets. The NZD/USD sits at 0.7800 currently.

There was little on the local agenda to drive the currency yesterday. Rather, the market remained focused on escalating tensions in the Middle-East and further signs of stress in emerging market currencies.

In an environment of broad risk aversion the ‘risk-sensitive’ NZD came under selling pressure along with the AUD.

The NZD/USD slipped from around 0.7820 last evening, before finding support at 0.7770. It has clawed its way back to 0.7800 this morning.

The NZD has also declined on the crosses.

However, support for the NZD/GBP continues to hold just above the crucial 0.5000 level. The NZD/EUR has descended further to 0.5830, its lowest level since December 2011.

The NZD/AUD extended its gains yesterday, but found resistance just above 0.8720 last evening. It has subsided overnight to sit around 0.8680 currently.

There is little on the local agenda today aside from Q2 AU construction work data.

The greater driver of the NZD and the cross is likely to be global risk sentiment. In this regard, markets will be watching developments in the Middle-East closely.

For today, support for the NZD/USD is eyed at 0.7760, while resistance will likely be encountered at 0.7850.

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Majors

It was a classic case of risk aversion in currency markets overnight. The JPY and CHF were the strongest performers, while the AUD and NZD underperformed.

Overnight moves were not driven by data, which actually came close to expectation on both sides of the Atlantic. Rather, escalating tensions in Syria and the prospect of US-led intervention rattled markets.

The ‘crisis’ in specific emerging market currencies also continues to unfold. The TRY and INR declined a further 2-3%, to be down 13% and 23% respectively since the start of May (when markets began to seriously anticipate US QE ‘tapering’).

Our risk appetite index (scale 0-100%) has fallen to 58%, from 65% at the end of last week.

The Euro Stoxx 50 closed down 2.56% while the S&P500 is currently down 1.45%. Brewing Middle-East tension has seen the WTI oil price surge to $109/barrel, its highest level since its spiked toward $110 in February last year.

In this backdrop, currency performance has fallen along the traditional ‘safe haven’ versus ‘risk-sensitive’ spectrum. The JPY and CHF have been key outperformers. The JPY has strengthened 1.50% relative to the USD over the past 24-hours. The USD/JPY sits at 97.10 this morning.

The ‘risk sensitive’ AUD came under selling pressure along with the NZD.

From around 0.9020 yesterday morning the AUD/USD now sits around 0.8980, at the lower-end of the range it has traded for the past two months. Today, AU Q2 construction work data will be released as a partial input to Q2 GDP. Our NAB colleagues expect just a 0.4% rise for Q2 GDP (to be released on 4 September).

A solid August German IFO survey (107.5 vs. 107.0 expected) was insufficient to boost the EUR last night. After the release the EUR/USD actually fell as low as 1.3330, before finding its feet and clawing its way back to 1.3390 currently.

The USD index experienced some volatility overnight, trading above 81.50 earlier in the evening before slumping to 81.15 this morning.

Today, the market will remain focused on developments in the Middle-East. In addition, the US will release MBA mortgage applications and pending home sales data tonight.

The market will be highly sensitive to these housing given the disappointing US new homes sales data last week. Any further disappointment could extend USD softness.

All its research is available here.