Opinion: NZ$ lurches under 70 USc after China warns on housing bubble

By Mike Jones In an abrupt change of recent fortunes, the NZD has been the weakest performing currency over the past 24 hours. Having started the week a touch above 0.7150, NZD/USD slipped to 2½ month lows below 0.6950 overnight. Sharply lower appetite for risk weighed on the NZD/USD last night. Risk appetite was dragged lower by a couple of factors. First, investors are nervous China may take additional steps to slow Chinese demand following comments from Chinese Premier Wen he would act “decisively” to prevent a house price bubble in China. Second, markets are worried Europe’s sovereign debt crisis could spread and derail the global economic recovery. After a tentative recovery towards the end of last week, our risk appetite index (which has a scale of 0-100%) has slumped to 40% - well below the long-run average of 50%. Rising risk aversion and fears about the strength of the global recovery took a toll on both equity markets and commodity prices. Asian equities plunged 2.1-5.1% yesterday, while US stocks are currently around flat, having been down as much as 2% at one stage. The CRB index (a broad index of commodity prices) fell a bit over 2%, driven by sizeable declines in metals and energy prices. Against a backdrop of plunging risk appetite and sliding commodity prices, investors trimmed positions in ‘growth-sensitive’ currencies like the NZD in favour of ‘safe-haven’ currencies like the USD and JPY. NZD/JPY dropped from 65.50 to almost 64.00 and NZD/USD was briefly dragged below 0.6950. While this Thursday’s Budget has potential to be mildly NZD/USD positive, we suspect developments in European sovereign debt markets will remain the bigger driver of the currency this week. Further slippage in equities and risk appetite could see NZD/USD test support towards 0.6920. Watch out for a daily close below 0.6950. This would suggest a deeper correction towards 0.6800 is on the cards. Majors The “safe-haven” currencies of the USD and JPY were again the strongest performing currencies overnight. Risk aversion has been the dominant theme in financial markets over the past 24 hours. Fears the European sovereign debt crisis could escalate and derail the global economic recovery has seen equity markets plummet, risk appetite dry up, and ‘growth-sensitive’ currencies sold aggressively. Negative sentiment began to swirl in the Asian time zone. The Shanghai Composite index fell 5.1% yesterday – the steepest one day fall in eight months – to the lowest level in a year. The Nikkei and the Hang Seng both fell around 2%. Not only are investors nervous about Europe’s worsening debt crisis, but Chinese Premier Wen said China would act “decisively” to prevent excessive gains in house prices – prompting speculation further policy tightening in China is likely. Commodity prices and ‘commodity-linked’ currencies suffered as a result. The CRB index (a broad index of commodity prices) plunged 2%, while oil prices have fallen about 1.5% to 5-month lows below US$70/barrel. After Friday’s steep falls, European and US equities ended the night roughly flat (the S&P500 was down nearly 2% at one stage). However, the VIX index (a proxy for investors’ aversion to risk) jumped from 31% to as high as 35% overnight. Plunging risk appetite and losses across global equities saw investors increase positions in “safe-haven” currencies like the USD and JPY. GBP initially led the declines in the major currencies. George Osborne, the new UK chancellor of the exchequer, claimed the UK’s public finances were in a much worse state than the outgoing Labour government had suggested, and May house price data revealed a slowing in UK house price growth (to 4.3% in May from 6.0%). As a result, GBP/USD slid to a 14-month low of nearly 1.4250, before drifting higher overnight. Broad USD strength, combined with widespread fears about the effects of fiscal austerity measures on growth, saw EUR/USD slump to a 4-year low of nearly 1.2250 yesterday. However, a mild short squeeze (speculative investors currently hold the largest net short EUR position on record) saw EUR/USD climb around 1½ cents off its lows overnight. The ECB’s announcement it will ‘sterilise’ €16.5b of its recent bond purchases using term deposits allayed fears the ECB’s bond purchase programme would eventually morph into full blown quantitative easing. While the downtrend in EUR/USD appears to have paused for now, we wouldn’t be surprised to see further falls this week. Initial resistance is at 1.2450 with the next key support level around 1.2140. *All of the research produced by the BNZ Capital team of economists is available here