By Mike Jones
After drifting lower for most of the week, the NZD recovered some lost ground overnight. A sharp drop in risk aversion propelled NZD/USD back above 0.7500, from closer to 0.7400 this time yesterday.
All the doom and gloom about Europe’s sovereign debt woes was forgotten overnight. Instead, investors focused on the positives from a swathe of upbeat manufacturing data. Manufacturing PMIs out of China, Europe, the UK and the US all impressed.
Adding to the positive sentiment, worries about the plight of Europe’s troubled sovereign states eased amid rumours the ECB could step-up its program of sovereign bond buying. European credit spreads eased noticeably as a result, sending equity markets and commodity prices racing higher.
The EuroStoxx 50 jumped 2.7%, the S&P500 rose around 2.1% and oil prices climbed 2.8%, to US$86.50/barrel. Our risk appetite index (which has a scale of 0-100%) jumped a whopping 7 percentage points to 60.4%.
Recovering risk appetite and rising commodity prices bolstered demand for “growth-sensitive” currencies like the NZD, at the expense of “safe-haven” currencies like the USD and JPY. NZD/JPY climbed from 62.00 to above 63.00, helping drag NZD/USD back towards 0.7500.
A solid result at last night’s Fonterra auction may have also helped underpin NZD sentiment. Milk prices rose 1.6% to US$3594/tonne, despite the headwinds from rising global dairy supply and a 3% bounce in the USD since the last auction.
In the short-term, we suspect direction in the NZD/USD will continue to come from offshore, in particular how global risk appetite fares in the wake of tonight’s ECB policy announcement. Speculation is mounting the ECB may announce further measures to support sovereign debt markets. Also keep an eye out for today’s Australian retail sales and trade data (both due at 1:30pm NZT).
The USD reversed all of the previous day’s gains overnight as a rebound in risk appetite cooled demand for “safe-haven” assets.
Widespread evidence of a pickup in global manufacturing activity has bolstered financial market sentiment over the past 24 hours. Manufacturing PMIs in China, Europe, the UK and the US all impressed. All easily held above the 50 level consistent with expansion in the manufacturing sector.
At the same time, worries about contagion from Europe’s sovereign debt crisis eased. A report in the Financial Times suggested the ECB could step up its purchases of peripheral sovereign debt following comments from ECB President Trichet to the European Parliament. Also, the head of the European Financial Stability Facility said policy makers were “serious about protecting the euro” and speculation of a break-up was plain “wrong”.
European sovereign credit spreads fell sharply. The spread 10-year German bond yields and yields on Portuguese, Spanish and Irish sovereign bonds fell 35bps, 33bps and 52bps respectively.
The more positive global growth sentiment was also reflected in strong gains in equity markets and commodity prices. European stock indices jumped 1.6-4.4%, the S&P500 surged 2.1% and the CRB index (a broad index of commodity prices) rose around 2%.
Renewed risk appetite (the VIX index fell 3% to 20.50%) prompted investors to trim positions in “safe-haven” currencies like the USD and JPY, most notably against the EUR. From below 109, EUR/JPY soared nearly 1.8% to 110.50, and EUR/USD jumped from 1.3000 to around 1.3150. Most of the major currencies were dragged higher in the EUR’s wake.
Still, the extent of the USD’s losses was limited somewhat by a batch of solid-looking US data. The ISM manufacturing index held at a healthy 56.6 in November (56.5 expected), the November ADP survey revealed an above-expectations 93k jobs gain, and October construction spending defied expectations of a fall (0.7% vs. -0.3% expected). The stronger data, combined with reduced demand for “safe-haven” assets saw 10-year US Treasury yields climb around 12bps to 2.92%.
Looking ahead, investors’ attention now turns tonight’s ECB policy announcement for further confirmation the ECB is prepared to take action to address the malaise in sovereign debt markets. The release of Eurozone PPIs and (revised) Q3 GDP will further focus attention on Europe.
* Mike Jones is part of the BNZ research team.