Opinion: NZ$ caught in heavy risk aversion selling
4th Sep 08, 9:19am
By BNZ Currency Strategist Danica Hampton There has been all sorts of carnage in currency markets over the past 24 hours. NZD/USD skidded from above 0.6900 yesterday morning to below 0.6740 last night "“ its lowest level since 17 August 2007. Some of the NZD weakness is attributed to macro fund selling, but it was really risk aversion inspired selling of NZD/JPY (following heavy losses in Asian equities and news that Lehmans was closing one of its commodity funds) that prompted the currency's collapse under the 0.6800 level. However, the NZD/USD weakness was short-lived. Market participants seemed eager to take profits on short NZD positions ahead of tonight's central bank decisions and Friday's US non-farm payrolls. It's worth noting, NZ-US 3-year swap spreads have widened about 10bps to 3.60% over the past week, which may also be providing a bit of support for NZD/USD. Nor should we forget that a sustained rapid drop in the TWI may mean the RBNZ takes a more measured approach to cutting interest rates in coming months. Demand was noted from real-money and custodial accounts and NZD/USD rebounded from below 0.6740 and finished the night closer to 0.6850. Given the extreme moves we've seen over the past few days, we can't help but think NZD/USD is overdue a bit of consolidation. While both the ECB and the Bank of England expected to keep rates steady, at 4.25% and 5.00% respectively tonight, ECB President Trichet will likely reaffirm his inflation concerns. As such, we wouldn't be surprised if further profit-taking keeps the USD heavy in the lead up to Friday's US non-farm payrolls release. For today, we suspect the downside will be limited to the 0.6800-0.6810 region. Expect some headwinds ahead of 0.6900, but a break above this level could see the currency extend its gains up towards 0.6950-0.6960. Majors Currency markets have been a real roller-coaster ride over the past 24 hours. During yesterday's Asian session, it was all about a firmer USD and risk aversion inspired selling of JPY crosses. The USD was bolstered by growing conviction that growth elsewhere in the world is slowing at least as sharply as that in the US and a large pull-back in crude oil prices. Meanwhile, heavy losses in Asian equity markets and news that Lehmans was shutting down one of its commodity investment funds, triggered heavy selling of JPY crosses like EUR/JPY and NZD/JPY. Japanese margin accounts were reportedly heavy sellers of EUR/JPY. The currency fell from above 158.00 to below 156.50 triggering a massive wave of stop-loss selling on the way. Lacklustre Eurozone data did little to help EUR sentiment. Retail sales in the Eurozone fell 2.8%y/y in July (vs. -2.1% forecast) adding to concern the region may be on the brink of recession. Against a backdrop of a firmer USD and EUR/JPY supply, EUR/USD sank from around 1.4520 to 1.4385 "“ its lowest level since 22 January 2008. However, with technical indicators suggesting EUR/USD is in "over-sold" territory and market participants keen to trim positions ahead of tonight's central bank decisions and Friday's US non-farm payrolls, the EUR/USD weakness was short-lived. It's also worth noting, US 2-year government bond yields have fallen 14bps to 2.24% over the past two days, which may also be eroding some support for USD. Profit-taking lifted EUR/USD off its lows and the currency rebounded from 1.4400 to 1.4480. As widely expected, the Bank of Canada kept rates steady at 3.00%. The accompanying statement described current conditions "appropriately accommodative", which disappointed market participants hoping for signs that rate cuts were on the near-term horizon. USD/CAD fell sharply from around 1.0777 to below 1.0600. Given the extreme currency moves we've seen over the past few days, we can't help but think markets are due for a bit of consolidation. Market attention now turns to tonight's central bank decisions. The ECB and Bank of England are expected to keep rates steady, at 4.25% and 5.00% respectively, but ECB President Trichet will likely keep up his hawkish faÃ§ade. We wouldn't be surprised if further position trimming keeps the USD heavy in the lead up to Friday's US non-farm payrolls release. -------------- * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.