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Safe haven currencies outperformed as risk appetite evaporated in Friday night trading.
Major US and European equity markets took a beating in Friday’s trading session, falling by circa 2%. This took the weekly decline in the S&P500 to 3.8%.
The VIX index shot up to as high as 25. There were three key drivers – investor angst ahead of the FOMC meeting later this week, crude oil prices plunging further to a 6-year low, and credit concerns, with a US high-yield mutual fund suspending redemptions.
Reduced risk appetite saw so-called safe haven currencies like JPY, EUR and CHF outperforming, while the commodity currencies underperformed. Of the currencies taking a hit,NZDUSD performed remarkably well, falling in the order of “just” 0.5% on the day to close the week at 0.6717 – still 70 bps higher than the level prevailing before Thursday’s RBNZ MPS and only slightly weaker from the level at the beginning of the week.
The NZD has held up well this week amidst a fall in risk appetite and global commodity prices, perhaps reflecting traders taking off short positions. That the NZD has not fallen as the fundamentals have weakened will not please the RBNZ, but we suspect that if market volatility holds up the ultimate result will be a weaker NZD.
The PBoC announced that it would publish a new Yuan index, comprised of 13 currencies, to “help bring about a shift in how the public and market observe RMB exchange rate movements”. This should reduce focus on the CNY/USD exchange rate, which at times has been in a very tight range, almost like the CNY was pegged to the USD.
The delinking with the USD would allow CNY/USD to depreciate when the USD strengthens, without necessarily constituting a PBOC-led “devaluation”. A weaker CNY this year has been one factor behind weaker EM currencies and the NZD. Anything that encourages CNY to weaken further – without the negative connotations of “devaluation” in the minds of investors – would also encourage a weaker NZD/USD at the margin.
The data calendar is light over the next 24 hours. Locally we have the BNZ Services PSI for November, which has been running quite strongly recently, albeit it did dip in October.
The end of the week comes to life with the highly anticipated FOMC decision on Thursday morning NZ time, and GDP data later that morning will also be a highlight. While the USD has been trending higher over the past year in anticipation of the first likely rate hike in a decade, the tone of the statement will determine how the US dollar might fare as the year draws to a close and early next year.
Somewhat counter-intuitively, the US dollar has typically weakened during past rate hiking cycles, but it is fair to say that this current cycle is like no other. Indeed, Fed tightening will be occurring at a time when other major central banks are on hold or still easing, which should continue to provide support to the US dollar.
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Kymberly Martin is on the BNZ Research team. All its research is available here.