by Kymberly Martin
NZ Dollar
The NZD/USD was the casualty of heightened risk aversion on Friday night. It was the weakest performer amongst its peers, ending the week at 0.8210.
The downshift in the NZD/USD in recent days has been entirely driven by offshore sentiment. Domestic data has provided nothing to challenge the view of an economy firing on all cylinders where interest rate hikes are imminent. We do not expect a hike at this Thursday’s RBNZ meeting, but do expect a start to a steady hiking cycle in March. We see the OCR 125bps higher, at 3.75% by year-end.
But the immediate focus of markets remains offshore. The cautious sentiment inspired by Thursday’s disappointing China PMI continued into weekend as emerging market currencies struggled to find some composure. As the VIX index (a proxy for risk aversion) spiked to its highest level since last October (above 18.0) the ‘risk sensitive’ NZD/USD was a naturally casualty.
The NZD/USD drifted lower over the course of Friday night to end the week at 0.8210. The currency remains comfortably within the broad 0.8100-0.8400 range that has sustained for the past three months. Support is now eyed around 0.8190, while resistance will likely be encountered approaching 0.8320.
On the crosses, the most striking move on Friday night was the continued collapse in the NZD/JPY in typical ‘risk-off’ fashion. The NZD/JPY ended the week around 84.20, its lowest level since early December.
Meanwhile, the NZD/GBP and NZD/AUD remain at key levels. The NZD/GBP once again flirts with the psychologically important 0.5000 level that has marked its lows for the past eighteen months. However, it was given some reprieve late on Friday night, as BoE Carney’s comments weighed on the GBP. The NZD/GBP ended the week around 0.4990.
The NZD/UAD pushed to new highs above 0.9500 on Friday night but ended the week at 0.9460. Today will likely be relatively low-key on the local front with Australia celebrating Australia day and Auckland out for their anniversary day holiday.
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Majors
As the ‘risk off’ mode in markets continued on Friday, the NZD and AUD underperformed as the JPY and CHF strengthened relative to the USD.
There was little new data delivered offshore on Friday night. However, the more cautious sentiment induced in markets by the previous day’s disappointing China PMI continued into weekend. Our risk appetite (scale 0-100%) ended the week at 49%, its first time below 50% since early October last year.
Consistent with this sentiment, equities ended in the red across the board. The Euro Stoxx 50 closed down 2.85% while the S&P500 closed down 2.10%. Meanwhile, with around a quarter of the S&P500 companies having now delivered Q4 earnings, the earnings surprise stands at +6.0%. This helps to provide some fundamental underpinning for the market.
In this backdrop, currencies traded in their classic ‘risk-off’ pattern with the JPY and CHF outperforming as ‘safe-haven’ currencies. Investors also sought refuge from the continued rout in emerging market currencies. The USD/JPY declined from above 103.40 to end the week at 102.40.
The GBP/USD fell on Friday night as BoE Governor Carney commented on the pound at the Davos world economic forum. He expressed concern that GBP appreciation would hamper exports, also reiterating monetary stimulus will remain exceptional for some time. The GBP/USD dropped from above 1.6600 to end the week around 1.6480.
The EUR/USD experienced some volatility in the early hours of Saturday morning, briefly spiking above 1.3730. However, it soon fell back to end the week around 1.3680.
Meanwhile the AUD/USD suffered from generally heightened risk aversion. Friday’s IMM data also showed speculative short positions in the AUD extending. AUD short positions, as of Tuesday last week, were at -64.7k, down from -52k the previous week. They are now almost back at their Q3 2013 extreme. The AUD/USD ended the week around 0.8680, its lowest level since July 2010. Today, Australia celebrates Australia Day.
Today, the Bank of Japan will release the Minutes of its December meeting. Tonight, the German IFO survey of business will be released along with UK house prices and US new home sales data. The market will also continue to keep a close eye on the Q4 2013 US earnings reporting season.
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