China uncertainties deepen, undermining commodities and global growth expectations. Risk appetitie collapses, JPY and bonds become safe havens. NZD falls below support levels

By Kymberly Martin

Volatility, volatility, volatility.

Overnight, in extreme markets, the NZD was the worst performer by some margin. It currently trades at 0.6520, while the ‘safe haven’ JPY has been the major outperformer.

It was another hair-raising night across most markets. Further 8%+ falls on Chinese equity indices were followed by a 5.3% fall on the Euro Stoxx 50. The S&P500 is clawing its way higher, but remains down 2.4%, while the WTI oil price has plunged another 4%. Moves were equally as violent in interest rate markets.

Our global risk appetite index (0-100%) has fallen still further, toward 18%, its lowest level since early 2009.

There were no data releases overnight to speak of. Rather fears appear wide-ranging.

The state of China and emerging markets is a dominant feature. The market also frets whether plunging commodity prices are representative of downward momentum in global growth more broadly. Imminent US Fed hikes has almost slipped down the agenda of fears, as the market is using current market ructions as an excuse to ratchet down expectations for Fed rate hikes.

In this backdrop the USD weakened further, while the ‘safe haven’ JPY was a key beneficiary. The USD/JPY trades around 2.5% lower this morning, at 119.00. Intra-night it had plunged toward 116.00 in a bout of extreme volatility that impacted most currencies. In the early hours of this morning, just prior to the opening of the S&P500, there was a complete melt-down of ‘commodity-linked’ currencies. The NZD, in particular, collapsed against the JPY and against all its major peers.

At the same time, the NZD/USD made a dramatic plunge from around 0.6560 to 0.6200 in a matter of moments. It has subsequently recovered some composure and returned to trade at 0.6520 currently. Equally, the AUD/USD plunged from 0.7230 toward 0.7050 before recovering. The moves highlight that as long as the spotlight remains on China, these currencies are likely to remain volatile and to be sold as liquid proxies during times of pressure.

The NZD sits lower against all of the crosses this morning, after its volatile intra-night moves. The NZD/GBP trades at 0.4140 this morning, having dipped briefly below 0.4000 intra-night. It appears to have broken through support levels of the past few weeks, now trading at levels last seen in Sept 2009.

The focus will remain on Asia today. The market will be looking to see what intervention measures regional authorities may take if markets continue to be disorderly. Tonight, there is a handful of German and US data releases that may get a look in, if markets manage to draw breath.

Kymberly Martin is on the BNZ Research team. All its research is available here.