Opinion: NZ$ drops as global risk appetites dry up on Greek turmoil

By Mike Jones After starting the week on top of the world, the NZD suffered a reality check overnight. A plunge in investors’ risk appetite saw NZD/USD unwind all of Tuesday’s gains, ending the night close to where it started the week around 0.7100. Last night’s movements in currencies were all about a spike in risk aversion. The European sovereign debt crisis deteriorated noticeably. Ratings agency S&P downgraded Greece’s sovereign credit rating to “junk” status (BB+) and Portugal was downgraded two notches to A-. Renewed fears over contagion from Greece’s fiscal woes saw European borrowing costs soar and investors’ appetite for risk take a clear turn for the worst. European equities slumped 2.5-3.8%, while US stocks are down 1.9-2.3%. Our risk appetite index (which has a scale of 0-100%) slipped more than 6 percentage points to 65.1%. The plunge investors’ risk appetite took a heavy toll on commodity prices. The CRB index (a broad measure of global commodity prices) fell almost 2%, led by a 2.5% decline in oil prices. Against this backdrop, investors shunned high yielding or “growth-sensitive” currencies like the NZD/USD in favour of “safe-haven” currencies like the USD and JPY. From levels close to year-to-date highs, NZD/JPY tumbled more than 2% to below 66.50, which helped drag NZD/USD back below 0.7150. Looking ahead, we suspect renewed fears about the health of European sovereigns will keep risk appetite subdued in the short-term, limiting NZD/USD bounces to around 0.7180. However, there is plenty of event risk to watch out for today. Media commentators and RBA officials alike have steered markets towards today’s Q1 Australian CPI figures as key in the RBA’s decision on whether to hike rates again in May (0.8%q/q expected). Underlying inflation of 0.8% or higher would likely support the case for another 25bps rate rise in May. Also keep an eye out for today’s NBNZ business confidence survey, due out at 3:00pm (NZT). Majors The USD and the JPY strengthened sharply overnight as a spike in risk aversion prompted increased demand for “safe-haven” currencies. The European sovereign debt crisis has gone from bad to worse. Overnight, ratings agency S&P downgraded Greece’s sovereign credit rating a full three notches to “junk” status (BB+), while Portugal was downgraded two notches to A-. S&P said the outlooks on both ratings are negative. While the Greek downgrade was more or less fait accompli, the Portuguese downgrade was more significant. Indeed, concerns Greece’s debt woes may be spreading to other troubled sovereigns sent markets into a tailspin. One-year CDS spreads (a proxy for default probability) on both Portugal and Greece blew out to record levels (of 340bps and 1080bps respectively) and equity markets were crunched. European equity indices fell 2.6-3.8%. US equities were slightly more resilient following some positive US earnings reports, but the S&P500 is still down around 2.2% at present. The US Senate’s grilling of Goldman Sachs over its role in inflating the US housing bubble weighed on US financial stocks. The VIX index (a proxy for investors’ risk aversion based on the implied volatility of the S&P500) spiked from 17.5% to almost 23% last night – the highest since February. Soaring risk aversion and tumbling equity markets saw investors trim positions in “growth-sensitive” currencies, in favour of “safe-haven” currencies like the USD and JPY. US Treasury yields fell 6-10bps, helping drag USD/JPY from 94.00 to around 93.20. A heavy toll was taken on EUR, as well as commodity-linked currencies like CAD, AUD and NZD. EUR/JPY slipped from 126.00 to nearly 123.00, while EUR/USD broke through support around 1.3200 to fresh 12-month lows. Already under pressure from the stronger USD, sentiment towards the GBP wasn’t helped by more election uncertainty. The results of three election polls last night all pointed towards a hung parliament in the May election, while last night’s UK retail sales and mortgage approvals data was also a tad disappointing. As a result, GBP/USD fell from 1.5450 all the way to nearly 1.5250. Looking ahead, we suspect European sovereign solvency fears and market chatter suggesting tomorrow morning’s FOMC statement could be hawkish will limit dips in the USD index to 81.60 in the short-term. Against this backdrop, we’d expect any bounces in EUR/USD to be limited to the 1.3250 region in the short-term. The next key support level in EUR/USD looks to be around 1.2990. *All of the research produced by the BNZ Capital team of economists is available here