Kiwi slides to 10 month low despite positive Fonterra news as risk appetite weakens

Kiwi slides to 10 month low despite positive Fonterra news as risk appetite weakens

Kiwi slides to 10 month low despite positive Fonterra news as risk appetite weakens

The New Zealand dollar (NZD) has continued on its path southwards over the past 24 hours. In fact, NZD/USD slipped to a fresh 10-month low below 0.6600 overnight.

Not even yesterday’s unquestionably positive Fonterra payout announcement was enough to stem the tide of negative sentiment towards the NZD. Fonterra announced its milk payout for next season will rise 50 cents to $6.60/kg per kg of milksolids.

Even more positive was Fonterra’s intimation the total payout (including dividend) could go through $8.00 per kg/ms if the current mix of the currency and commodity prices is maintained. Along with yesterday’s robust inflation expectations figures (2.8%q/q in Q2, from 2.7%), this only adds to the case for the RBNZ to begin withdrawing monetary stimulus sooner rather than later (we still favour a 25bps June hike).

Still, any positive effects on the NZD were easily overshadowed by a further deterioration in risk appetite overnight. Yesterday’s reports of increased military tensions between North and South Korea did nothing to help the global climate of risk aversion. Indeed, Asian equity markets plunged 1.9-3.5% and most Asian currencies were sold heavily (USD/KRW fell over 5% at one point).

Overnight, risk appetite remained in the doldrums. Rising interbank funding costs and fears over the health of the Spanish banking sector fuelled concerns about contagion from the European debt crisis. European equities chalked up sizeable losses and commodity prices tumbled. As a result, investors shunned ‘growth-sensitive’ currencies like the NZD in favour of ‘safe-haven’ currencies like the USD and JPY. For today, the local data calendar is bare – so direction for the NZD is expected to come from offshore equity market sentiment.

Near-term headwinds for NZD/USD in the form of negative momentum and generalised risk aversion remain in place for now. Against this backdrop, we suspect rallies will be limited to the 0.6750/60 region in the short-term. Initial support is eyed towards 0.6620.


Risk aversion marched higher overnight. As a result, both the USD and JPY strengthened on the back of increased demand for ‘safe-haven’ assets.

Not only are investors worried about contagion from Europe’s debt woes, but escalating geopolitical tensions between North and South Korea further put the kibosh on investors’ risk appetite yesterday. Asian equities were pummelled amid reports North Korea is preparing its troops for combat.

The Nikkei fell 3.1%, the Shanghai Composite Index dropped 1.9%, and the ASX 200 was down 2.9%. USD/KRW soared 4% to nearly 1280, to be up around 13% for the month to date. The negative sentiment continued into the offshore session. Of note, concerns over European contagion are starting to be reflected in higher interbank short-term funding costs. The 3-month USD Libor-OIS spread (an indicator of money market pressures) has increased from around 9bps two weeks ago to 35bps (albeit still some way off the crisis peak of 350bps) as banks have grown wary of lending to European intuitions. European bourses slumped 2.5-3.0% while the Dow fell 0.2%.

The VIX index (a proxy for risk aversion based on implied volatility of the S&P500) rose above 40%, nearly twice the 2010 average of 22%. The USD and JPY strengthened across the board as plunging global equities and rising risk aversion spurred demand for “safe-haven” assets. 10-year US Treasury yields dropped from 3.20% to 3.15% and gold prices rose back above US$1200/ounce. EUR bore much of the brunt of last night’s USD gains. I

ndeed, EUR/USD slipped to within a whisker of last week’s 4-year low around 1.2140. Not only did German regulators announce they intend to widen the ‘naked’ short-selling ban to all German stocks, but the IMF said Spain faces “severe” challenges. Market chatter suggesting the EUR may increasingly be used to fund carry trades (given the ECB will not be raising interest rates for some time) portends ongoing structural headwinds for the currency. ‘Commodity-linked’ currencies like AUD, CAD and NZD were hit hard by deteriorating risk appetite and a sharp drop in commodity prices.

The CRB index (a broad index of commodity prices) dipped 1.3%, with oil prices down a similar margin. Last night’s economic data was actually fairly encouraging, not that markets paid any attention. UK Q1 GDP was revised up to 0.3%q/q, as expected. Meanwhile, US consumer confidence, against all odds, jumped from 57.9 to 63.3 in May (58.5 expected).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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