Election of Labor in Australia a mixed bag for A$; widespread risk aversion in currency market
8th Sep 10, 8:37am
By Mike Jones
The NZD/USD has spent most of the past 24 hours consolidating in a relatively tight 0.7190-0.7240 range.
Yesterday’s formation of an Australian government was a mixed bag for the AUD/USD. Certainly, the knee-jerk response to the news Labor will form a minority government was to sell the AUD, given the amended mining tax will be retained.
But the losses were relatively short-lived. Having tested support around 0.9100, the AUD/USD recovered some of its losses with the reduced political uncertainty and yesterday’s marginally more hawkish than expected RBA statement no doubt providing some support (the RBA left rates on hold at 4.5%, as expected). The NZD/USD more or less mirrored yesterday’s movements in the AUD/USD, edging down to around 0.7190, before rebounding.
Overnight, renewed concerns about the plight of Europe’s financial sector triggered a bout of risk aversion. Not only did a Wall Street Journal article question the integrity of July’s European bank stress tests, but German banks were warned an extra €105b in capital may be required under new banking rules. Global equity indices recorded declines of 0.6-1.1% and our risk appetite index (which has a scale of 0-100%) tumbled from 59.5% to 53.6%.
With investors becoming more risk averse, some of the recent NZD enthusiasm was crimped as investors sought out the relative “safe-haven” of currencies like USD, JPY and the CHF. Nevertheless, the heaviest toll was taken on the EUR. Indeed, EUR/USD skidded from above 1.2850 to below 1.2700, propelling NZD/EUR from 0.5620 to 2-month highs around 0.5680.
Looking ahead, near-term focus for the NZD/USD is expected to remain offshore. This is particularly so given Statistics NZ has postponed today’s previously scheduled manufacturing and construction data due to the Christchurch earthquake. Near-term support on NZD/USD is eyed towards 0.7150, with initial resistance at 0.7260.
Widespread risk aversion was the main theme in currency markets overnight. As a result, “safe-haven” currencies like JPY, CHF and USD mostly strengthened.
Concerns about the health of the Eurozone financial system returned to the fore, eroding investors’ risk appetite and bringing to a halt the recent rally in equity markets and “risk-sensitive” currencies.
Not only did a Wall Street Journal article suggest July’s European bank stress tests understated some banks’ government debt exposures, but the German banking association warned the country’s 10 largest banks may need an extra €105b in capital under new banking rules.
European stock indices slipped 0.6-1.1% and peripheral European credit spreads widened – the Greek-German 10-year bond spread increased 25bps to 940bps, dangerously close to the May high of 965bps. A 2.2%m/m decline in July German factory orders (+0.5% expected) rounded out a rough night for the EUR. Indeed, the EUR/USD finished the night around 1.2700, from above 1.2850 this time yesterday.
With no US data to provide direction, US markets took their lead from across the Atlantic. In line with European stocks, the S&P500 dipped 0.7% and the VIX index (a proxy for risk aversion) jumped from below 21.5% to almost 24%. Heightened risk aversion saw investors’ increase exposures to “safe-haven” currencies like CHF, JPY and the USD, at the expense of CAD, GBP and AUD.
Of note, USD/JPY slipped from 84.20 to fresh 15-year lows around 83.50. Not only did safe-haven demand underpin the JPY, but Bank of Japan Governor Shirakawa largely ruled out the prospect of intervention to stem the JPY’s rise, saying “monetary authorities are unable to control currency rates freely”. The BoJ also offered few signals at yesterday’s policy meeting (where rates were left on hold at 0.1%) that aggressively monetary policy easing was likely anytime soon.
Yesterday’s formation of an Australian minority government was a mixed bag for markets. The Labor party led minority Government will keep the amended mining tax, which is a little negative for the AUD. Offsetting this was the reduced uncertainty of finally knowing who will lead the country. Having briefly slipped below 0.9100 following the announcement of the government’s formation, the AUD/USD recovered some of its losses through the overnight session.
* Mike Jones is part of the BNZ research team.