By Mike Jones
A broad-based weakening in the USD helped arrest the slide in the NZD/USD overnight. After dribbling off to nearly 0.7640, the NZD/USD bounced back above 0.7700 late in the night. Over the past few days, markets have been kept on edge by concerns about the sovereign solvency of Ireland and additional policy tightening in China.
Similar themes prevailed through the first part of the night. Not only did Chinese Premier Wen confirm China is looking at steps to restrain rising inflation pressures, but Ireland continued to resist the aid offerings of various EU/IMF officials. With risk appetite under pressure, investors’ further trimmed positions in “growth-sensitive” currencies, knocking NZD/USD down to around 0.7640. However, later in the night, the NZD/USD was buoyed by a broad-based weakening in the USD.
October’s terrible US housing starts figures quashed any speculation the US housing market might be in recovery-mode. At the same time, a surprise drop in CPI inflation underscored the Fed’s deflation fears. As sentiment towards the USD soured, the NZD/USD was pitched back above 0.7700. A bout of short-covering by speculative and leveraged players also underpinned the NZD overnight. It’s worth noting, the crisis besetting NZ’s kiwifruit industry took a turn for the worse yesterday.
Indeed, the kiwifruit disease PSA has now also been found in the South Island, posing additional risks to NZ’s $1b kiwifruit export industry. We’d be surprised if today’s data on NZ producer prices, capital goods prices, and consumer confidence had any material effect on the currency. Gyrations in global risk appetite continue to be the dominant near-term driver of the NZD. In this regard, keep an eye out for any headlines from the wrap-up of the European finance ministers meeting currently underway.
Confirmation of financial aid for Ireland would probably support risk appetite and the NZD.
Majors
The USD pared some of its recent gains overnight. Still, trading in most of the major currencies was confined to tight ranges as markets await news on the Irish sovereign debt situation. Through the first part of the night, worries about Chinese policy tightening and the Eurozone debt crisis bolstered demand for the USD as a “safe-haven”. Most of the major currencies drifted lower as a result. Asian stocks had another dour day after Chinese Premier Wen confirmed China was preparing measures to tame rising inflation pressure.
The Shanghai Composite Index fell 1.9%, to be down a whopping 9.8% over the past week. The Hang Seng slipped 2% and the ASX 200 fell 1.6%. Overnight, clearing house LCH Clearnet raised the margin requirements on Irish bonds from 15% to 30% and a Portuguese sovereign bond auction drew less demand than expected (bid cover ratio of 1.8 vs. 2.2 in the last auction). Still, the effect on European sovereign credit spreads was relatively minimal as investors continue to speculate on the chances of Ireland accepting an EU-IMF bailout.
Later in the night, the USD lost some of its lustre as disappointing data spurred worries about the US economic backdrop.
Most notably, the US CPI rose just 0.2% in October (0.3% expected), dragging the annual inflation rate (ex-food and energy) to just 0.6% – the lowest since records began in 1957. What’s more, the current malaise in the US housing market was reinforced by an 11.7% plunge in October housing starts (-2.0%m/m expected), to the lowest level since April 2009. With the weak data reinforcing the dovish stance of the Fed, US bond yields dipped 2-4bps late in the night, weighing on the USD. As a consequence, EUR/USD jumped from 1.3460 to almost 1.3540, and USD/JPY slipped from 83.50 to closer to 83.00.
The Bank of England’s November MPC minutes showed a 1-7-1 vote for no change in policy. Still, the text of the minutes revealed a change in tone, with the focus of the MPC moving away from more QE purchases towards the upside risks to UK inflation. Along with the weaker USD, the reduced risk of QEII from the BoE saw GBP/USD rise from 1.5880 to around 1.5950.
For today, all eyes will remain on Europe and whether or not any concrete proposals for Ireland will emerge from the EU finance minister’s meeting currently underway. We suspect an announcement Ireland is likely to accept EU/IMF aid would be supportive of risk appetite and “growth-sensitive” currencies like the AUD, CAD and EUR.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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