NZ dollar weaker after Japanese nuclear warning unleashes market turmoil; Oil and Gold down as growth, inflation views lowered

By Mike Jones

 

The NZD/USD tumbled to 6-month lows below 0.7280 overnight as Japan’s escalating nuclear crisis sent shockwaves through global markets. Increased demand for “safe-haven” assets saw the USD, CHF and JPY surge at the expense of “growth-sensitive” currencies like the NZD and AUD.

 

The rot began in Asian equity markets yesterday. Reports of a possible radiation leak saw the Nikkei plunge 10.6% with all other global equity indices also heavily in the red. Asian growth concerns also took a heavy toll on commodity prices. Oil prices dived nearly 3.5%. Our risk appetite index (which has a scale of 0-100%) dived to 51.6% (a 6-month low) from 59.4% this time yesterday.

 

Soaring risk aversion saw investors shun “risk-sensitive” currencies in favour of the relative “safe-haven” of the USD and JPY. From above 60.50, NZD/JPY skidded to 6-month lows below 59.00, helping drag NZD/USD below 0.7300 for the first time since September.

 

Still, the AUD tended to bear more of the brunt of investors’ generalised flight to safety. Not only is Australia regarded as more highly exposed to Japan (second largest trading partner, compared to fourth for NZ), but RBA rate hike expectations suffered a sizeable knock yesterday. Indeed, OIS markets now price a 50/50 chance of a RBA rate cut by May, having previously priced a modest chance of a tightening. A near 2c drop in the AUD/USD propelled NZD/AUD from 0.7320 to almost 0.7400 overnight.

 

Last night’s Fonterra milk price auction did nothing to help NZD sentiment. Average milk prices slipped 8.2% from the previous (fortnight ago) auction, broadly as expected. Nonetheless, prices are still up 17.5% for the year and likely to remain at favourable levels for some time to come.

 

Looking ahead, we suspect the current backdrop of elevated global risk aversion and equity market weakness will keep the NZD/USD heavy in the short-term. Rallies should be capped to 0.7380 on the day with initial support likely to be found on dips towards 0.7260. 

 

Majors

 

Financial market sentiment has nose-dived over the past 24 hours following a marked escalation in Japan’s nuclear crisis. Soaring risk aversion has seen “safe-haven” currencies like the USD, JPY and CHF appreciate strongly.

 

News of a possible radiation leak at the crippled Fukushima nuclear plant sent shockwaves through global markets yesterday afternoon. The consequent concern about a slowing in Asian growth knocked Asian equities for six. After plunging 14% at one stage, the Nikkei closed down 10.6% – the third largest drop in history. Elsewhere, the Hang Seng fell 2.9%, the ASX 200 was down 2.1% and the Shanghai Composite slipped 1.4%.

 

Overnight, investors’ downbeat mood was reinforced by reports of escalating Middle Eastern violence. Bahrain’s King declared a state of civil war and fighting in Libya continued. The S&P500 is currently down around 1.1%, following a 1.4-3.2% slide in European equities. Meanwhile the VIX index (a proxy for risk aversion) jumped from 21% to a 6 month high above 25%. 

 

Against a backdrop of equity market weakness and soaring risk aversion, investors stampeded back in to “safe-haven” assets like US Treasury bonds, the CHF and JPY. As a result, US Treasury yields slipped 5-8bps, USD/JPY dived from 82.00 to below 81.00 and USD/CHF slumped to a all-time low of nearly 0.9150.

 

Meantime, a heavy toll was taken on “risk-sensitive” assets. Crude oil prices were shunted over 3% lower, the CRB index (a broad index of global commodity prices) fell 3.6% and “growth-sensitive” currencies like CAD, AUD, NZD all shed over a cent relative to the USD. The EUR held up better than most, recovering to 1.3980 after a brief spurt below 1.3900. Bolstering EUR sentiment, US think tank Medley said the ECB will still hike in April regardless of global jitters.

 

There was little to get excited about in this morning’s FOMC policy announcement. Indicative of such, US interest rates, stocks and the USD barely budged following the statement’s release. As expected, The Fed acknowledged the US economy is on a firmer footing and conditions in the labour market appear to be improving. The FOMC nudged up its reading of underlying inflation from ‘trending downward’ to ‘being subdued’.

 

Key for policy, however, is the retention of the line, “Currently the unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low.” Accordingly, the Fed said it would continue with its program of purchasing $600bn of US Treasury securities by the end of Q2, 2011. It also repeated it expected conditions to warrant exceptionally low levels for the Fed funds rate for an extended period.