By Mike Jones
The NZD/USD continued its slide overnight, as surging global risk aversion dented demand for “growth-sensitive” currencies.
The NZD/USD has slipped around 1c over the past 24 hours, to 2-week lows around 0.7660. The USD continued its comeback overnight. Indeed, after hitting 11-month lows in the wake of the US Fed’s restarting of quantitative easing, the USD index has rebounded nearly 5% over the past couple of weeks. Financial market sentiment nose-dived overnight thanks to the double whammy of rising fears about Asian inflation and ongoing jitters about the health of European sovereigns.
More rumours of Chinese action to cool inflation pressures saw Asian equity markets dip into the red yesterday.
Meantime, an EU stalemate over how to best deal with the malaise in the Irish banking sector knocked European equities for six. Greece and Spain were also in the headlines again, for all the wrong reasons. The EuroStoxx 50 index dived 2.3%, the S&P500 slipped around 1.7% and our risk appetite index (which has a scale of 0-100%) was belted 7 percentage points lower to 60.2%.
Deteriorating risk appetite saw investors spurn “growth-sensitive” currencies like the AUD and NZD in favour of “safe-haven” currencies like the JPY and USD. NZD/JPY skidded from 64.40 to around 64.00 and NZD/USD dropped from 0.7750 to closer to 0.7650. The results from last night’s Fonterra online milk price auction broadly matched our expectations. Milk prices dipped 0.1% to be down 4.1% on an annual basis.
Overall, we are still comfortable, for now, with Fonterra’s forecast payout for the current season of $7.00 to $7.10, despite the impact of the high NZD. For today, we suspect subdued risk appetite and the resurgent USD will limit NZD/USD rallies to the 0.7730/50 region.
This afternoon brings the NBNZ regional trends survey with its usual rough-as-guts pointer to Q3 GDP.
Majors
The USD continued to strengthen overnight as sliding equity markets and rising risk aversion encouraged demand for “safe-haven” assets. Worries about Asian inflation and European sovereign solvency sent financial markets into a tailspin last night. The rot began in Asian equity markets. Reports China will soon unveil food price controls and limits on commodity speculation in an attempt to rein in inflation pressure saw the Shanghai Composite index plunge nearly 4%, to a one month low yesterday.
The baton was soon passed to European and US markets. Despite a slew of mostly better-than-expected economic data, worries about the health of European sovereigns saw European equities plunge 1.9-2.5%, while the S&P500 slipped around 1.7%. Risk aversion soared. The VIX index (a proxy for risk aversion based on the volatility of the S&P500) jumped to nearly 23% – the highest since October. Not only were Spain and Greece forced to pay noticeably higher yields at last night’s sovereign bond auctions, but Greece’s largest union said “achieving the 2010 and 2011 fiscal targets seems doubtful, even impossible".
To make matters worse, a resolution to the Irish debt crisis seemed to grow more distant. Ireland again dismissed calls from Eurozone officials to ask for financial aid. Against a backdrop of soaring risk aversion, investors shunned “growth-sensitive” currencies like CAD, GBP and AUD in favour of the relative “safe-haven” of the USD and JPY. This was despite another batch of gloomy US data. Core October producer prices recorded their largest decline in four years (-0.6%m/m vs. +0.1% expected) and industrial production was flat, against the 0.3% expansion expected.
A surprisingly strong November German ZEW sentiment survey helped the EUR hold up relatively well against the stronger USD. However, the GBP ended the night as one of the weakest performers, thanks to dovish comments from Bank of England Governor King. King said the BoE “can do further QE if that turns out to be necessary” knocking GBP/USD from above 1.6050 to almost 1.5850. Looking ahead, we suspect tonight’s data developments will remain confined to the background as the European sovereign debt crisis remains in markets’ spotlight.
All the same, the BoE November MPC minutes, and US CPI and housing starts for October will be worth keeping an eye on. All up, we suspect the backdrop of generalised risk aversion and equity market weakness will keep the USD index supported on any dips towards 78.40.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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