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NZ dollar sharply lower after North Korean attacks and growing European debt turmoil

NZ dollar sharply lower after North Korean attacks and growing European debt turmoil

By Mike Jones*

It never rains, it pours it seems and as markets respond to developments in the Irish black comedy the North Koreans decide we haven’t been paying them enough attention.

Risk appetite was scuppered as news broke of the North & South exchanging artillery fire, immediately impacting regional currencies & equity indices.

Just what we needed when the markets were already pressured by concerns that Ireland may not have the political will and ability to see through any rescue agreement.

The NZ$ was hit by these broader market moves, as was the AU$, and both despite ongoing sovereign investor and commercial demand at times open this morning near their overnight lows. Locally yesterday we did get some solace from Moody’s Investors Service, their comments in contrast to the previous day from S&P.

Phrases like “New Zealand’s government finances are “relatively strong” even after deteriorating over the past two years” and “The nation’s performance during the global financial crisis “reinforced” Moody’ AAA credit rating for New Zealand, the highest possible” worth noting and in some way balanced the deliberations of Standard & Poor’s.

Yesterday we had awaited the RBNZ survey of expectations, in the end these revealed a relatively steady 2-year ahead inflation view, of 2.60%. The RBNZ will be relieved it didn’t go up.

But nor will the Bank be happy that it’s as lofty as it is after the recession we’ve been through.

Financial market pessimism was in full flow overnight as investors continued to fret about the threat of contagion across the Euro Zone periphery following Ireland’s bailout and the stability of banks within Europe after summer stress tests were found wanting as far as Irish banks were concerned.

Heightened tensions between North and South Korea after Pyongyang reportedly fired dozens of shells at a South Korean island killing two in the fiercest skirmish in decades added to the broad move against risk. After an early bout of two-way price action in FX the pessimistic mood set it and the market ignored any news to the contrary.

The NZ$ slumped to the US76 cent level in fractious NY trade, leveraged and technical accounts noted sellers as “long” risk positions are pared, in part the looming Thanksgiving holiday encouraging traders bias to find haven in selective assets such as the USD, US Treasuries and Gold.

On the day we have FOMC minutes at 8am local time to negotiate, otherwise it’s a light day on the NZ calendar. Though there’s plenty of developments offshore to monitor on the news wires with some second tier updates from Australia.

On the day, rallies should be limited to the 0.7650/0.7675 window with ongoing domestic support eyed at the 0.7550/0.7575 area. While the headlines are dominated by the sell off in FX risk and developments from Europe and the Korean peninsula there was actually some robust French and German PMI updates, service sector activity in the former and manufacturing in the latter surging to new cycle highs of 57.5 and 58.6 respectively.

They potentially set the scene for a stronger set of global PMI’s, including that from China, at the start of December.

An improvement in US Q3 GDP to 2.5% from the preliminary 2%, with encouraging performances from fixed investment were ignored, while a weaker than forecast (2.2% decline) in US existing home sales for October was seized on. Moody’s commented that it is concerned about Portugal. Note however that S&P and Fitch already have Portugal on negative watch at a lower rating than Moody’s.

Germany’s Merkel and Schaeuble both grabbed headlines as they noted the seriousness of the European situation and the risks to the single currency. At a time when strong leadership is called for it’s hard to fathom why Ireland would add the uncertainty of an election, but that’s what PM Cowen has done, and the uncertainty has meant a rough night for EU periphery debt and swap spreads.

Equity markets suffered, with Wall Street lower by some 1.5% and seemingly on its way towards the long-term 1173 support that US shares broke up through in October. Maintaining the strong negative correlation between stocks and the USD, the greenback pushed up towards the key 79.72 Fibonacci level (61.8% of the 74.17–88.71 rise).

The stars appear to be aligning for a test of these important levels alongside EUR/USD’s key support from its August peak at 1.3334.

The importance of the aforementioned key levels in the S&P and the USD suggest a break will not be easy, but with a Thanksgiving shortened week in the US there is a growing feeling that the USD could be in for a further squeeze higher if equity markets decide now is the time to book some profits.

* Mike Jones is part of the BNZ research team. 

All its research is available here.

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