NZ$ falls back to earth after surprise Chinese interest rate hike

NZ$ falls back to earth after surprise Chinese interest rate hike

By Mike Jones*

After climbing to nearly 0.7600 yesterday, the NZD/USD crashed back to Earth last night. A surprise Chinese interest rate hike put the kibosh on investors’ risk appetite, knocking NZD/USD back below 0.7500.

Early in the night, solid appetite for NZD and AUD from commercial and real money players underpinned the NZD/USD. And an upbeat German ZEW economic confidence survey ensured investors’ risk appetite remained well supported.

However, China’s unexpected rate hike saw sentiment turn on a dime. For the first time in nearly 3 years, the People’s Bank of China raised its benchmark 1-year lending and deposit rate by 25bps, spurring speculation Thursday’s Chinese growth and inflation figures could be uncomfortably strong.

Rising global growth concerns in the wake of the Chinese announcement saw US stock indices dive almost 2.0%, while fears of reduced Chinese commodities demand knocked the CRB index (a broad index of commodity prices) down around 1.9%, driven by a 3% slide in oil prices. Meantime, our risk appetite index (which has a scale of 0-100%) slipped 2 percentage points to 65.3%.

Against a backdrop of sliding commodity prices and rising risk aversion, investors trimmed long positions in “growth-sensitive” currencies like AUD and NZD in favour of the relative “safe-haven” offered by the USD and JPY. NZD/JPY skidded from 61.50 to below 60.80, helping drag NZD/USD below 0.7500. Still, the AUD was hit relatively harder given Australia’s higher exposure to Chinese growth. As a result, NZD/AUD was propelled from 0.7650 to above 0.7700.

Last night’s Fonterra online milk price auction result broadly aligned with our expectations. Prices slipped a further 2.5%, on top of the 1.3% fall in the last auction. For today, initial support on NZD/USD is eyed around 0.7410.

Resistance will be found towards 0.7550.

Majors

The USD strengthened against all of the major currencies overnight after an unexpected Chinese rate hike sent markets into a tailspin. The People’s Bank of China raised its benchmark 1-year lending and deposit rate by 25bps, the first rise in almost three years.

Fears tighter Chinese monetary policy could dampen Chinese and global growth took a heavy toll on sentiment. Equity markets and commodity prices tumbled, bolstering appetite for “safe-haven” currencies like the USD and JPY at the expense of “growth-sensitive” currencies like AUD, CAD and NZD.

Oil and gold prices both fell just over 2%, the Eurostoxx 50 European stock index declined 0.5%, and the S&P500 slipped 0.9%. The CRB index (a broad index of commodity prices) ended the night down around 1.3%.

Another bout of position squaring by speculative and leveraged accounts only amplified the USD’s gains. USD/JPY posted the biggest one day rise since the Bank of Japan’s 15 September intervention, while the EUR, GBP and CHF all notched up losses of 1.0-1.1% against the broadly stronger USD. Not surprisingly though, the AUD was hit the hardest given Australia’s heavy exposure to Chinese growth and commodities demand. From around 0.9900, the AUD/USD dived 1½ cents to below 0.9750.

Prior to the shock Chinese announcement, the USD had already been on the ascendancy. US Treasury Secretary Geithner did his best to assure markets the US was not running a weak USD policy, saying the US will work to “preserve confidence in a strong dollar”.

More dovish rhetoric from US Fed officials did little to disrupt the stronger USD trend, supporting our supposition quantitative easing II is close to fully priced. Atlanta Fed President Lockhart repeated his call for aggressive Fed action, suggesting the new asset purchase program could amount to US$100b per month. Fed officials Evans and Dudley espoused similarly dovish sentiments.

The Bank of Canada left its benchmark interest rate unchanged at 1% overnight, as expected. However, the BoC slashed its growth forecasts for 2010 and 2011 and said "the economic outlook for Canada has changed." The more downbeat economic assessment saw USD/CAD leap from 1.0200 to above 1.0350.

Looking ahead, the GBP will be vulnerable to any talk of additional QE from tonight’s Bank of England minutes, while the Fed’s Beige Book and a speech from the Fed’s Lacker will help shed more light on the US outlook. For today, the USD index is expected to find support on any dips towards 77.30 given the rising risk aversion backdrop.

* Mike Jones is part of the BNZ research team. 

All its research is available here.