Antipodean currencies hit as China's money market rate jumps markedly higher

by Kymberly Martin

NZ Dollar

The NZD/USD was the weakest performer relative to its key peers over the past 24-hours. It trades at 0.8390 this morning.

Despite a relatively stable USD overnight, the NZD declined along with the AUD as risk sentiment waned. As concerns focus on the China and the willingness of officials to bolster the economy, Antipodean ‘risk sensitive’ currencies were a natural casualty.

The NZD/USD, which had been on a gradual descent during the day, fell below 0.8400 overnight to sit at 0.8390 currently.

The NZD was also weaker on the crosses, most notably versus the ‘safe haven’ JPY. The NZD/JPY has fallen from 83.50 yesterday afternoon to sit around 81.50 this morning. Falls were also notable against its European peers, with the NZD/GBP and NZD/EUR slipping to sit at 0.5180 and 0.6080 respectively this morning.

The NZD/AUD gapped lower yesterday afternoon on the release of stronger-than-expected AU headline CPI data. The NZD/AUD then found its feet overnight, trading a fairly tight range between 0.8700 and 0.8720.

Today, the NZ September trade balance data will be released. It might be a fraction early for the post-drought rebound in agriculture production to show in the numbers. We anticipate a monthly trade deficit of $586m, which is a smaller deficit than consensus is expecting.

But the driver of wider market sentiment today may be the release of the HSBC China Flash PMI (2.45pm NZT). Consensus expects a slither of improvement to 50.4. Given current market sensitivities, a disappointment would not be well absorbed by the market. A heavy toll would likely be taken on the NZD along with the AUD.

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Majors

The USD was in quiet consolidation mode overnight. However, the AUD and NZD gave back all of their previous day’s gains and more.

Overnight, our risk appetite index (scale 0-100%) slipped a little from 70 to 68%. Equities declined moderately across the board (the S&P500 is currently down 0.50%).

A shift in market focus toward China seems to have contributed to the more sober mood. China’s money market rate jumped the most since July as the PBOC refrained from adding funds to markets. A central bank adviser said earlier this week that the Bank may lean toward tightening policy if inflation were to accelerate.

Dampened risk appetite took a heavy toll on the AUD and NZD. The AUD had been spurred higher earlier in the day after the release of AU Q3 CPI (2.2%y/y vs. 1.8% expected). The result was comfortably within the RBA’s 2-3% target range, but the result briefly saw the AUD/USD spike toward 0.9760.

Later in the day, as the market mood was dampened, the AUD/USD fell back to trade around 0.9620. With China forefront of the market’s mind, the release of the October HSBC China Flash PMI today will be closely watched. Consensus expects the index to remain in expansion at 50.4. A fall into contraction (below 50) would likely provide a sharp blow to market sentiment and the AUD in particular.

The JPY was a key ‘safe haven’ beneficiary of heightened risk aversion overnight. The USD/JPY declined from 98.20 before finding support at the 97.20 level.

Meanwhile, the release of the Bank of England’s Minutes for October showed the Committee to be in no hurry to adjust policy settings in either direction. The Committee acknowledged the UK recovery has started to gain traction, and took some comfort from the recent decline in UK gilt yields. However, the GBP/USD was on a softer path for most of the night, finding support at 1.6120, before returning to trade at 1.6180 this morning.

The Eurozone will be in the spotlight tonight with the release of PMI data across the region. Tonight, US jobless claims and September new homes sales data will be released. However, much of October data is likely to be taken with a pinch of salt, given the impact of the US government shutdown during this period.

All its research is available here.