By Mike Jones*
A night of vicious volatility in currency markets has seen the NZD/USD trade a wide range over the past 24 hours.
After initially sliding to almost 0.7450, the NZD/USD finished the night closer to 0.7550, thanks to a late improvement in investors’ risk appetite.
The NZD/USD spent the early part of the night drifting lower.
The ECB disappointed investors looking for a step-up in its bond buying program, weighing on the EUR. And heavy selling of NZD/AUD from real money and short-term speculative accounts added to the downward pressure on the NZD/USD.
However, the slide in the NZD/USD soon ran out of steam.
Worries about the European debt crisis were soothed by reports the ECB was aggressively buying sovereign bonds and Spain managing to issue €2.5 worth of debt.
After a stuttering start, European equity indices surged 1.3-2.8%, indicative of a broader improvement in investors risk appetite.
As a consequence, investors shunned “safe-haven” currencies like the USD, in favour of the EUR, AUD and NZD.
From below 1.3100, the EUR/USD rebounded to nearly 1.3250, helping drag the NZD/USD back up to around 0.7560.
As we move towards year-end, we continue to hold the view the balance of risks around the NZD/USD outlook are tilted towards the downside.
For one thing, it’s hard to see the latest bout of European sovereign debt jitters fading noticeably anytime soon.
Further escalation in global risk aversion would weigh on the NZD/USD. We’re also cognisant of the upside potential in US bond yields.
Should US economic data continue to gradually improve, further gains in US bond yields would serve to provide headwinds for NZD/USD through a lower NZ-US interest rate differential. In the near-term, watch for a daily NZD/USD close below 0.7400.
We suspect this would pave the way for a deeper correction towards 0.7200.
For today, NZD/USD rallies are expected to be capped by 0.7590 resistance ahead of tonight’s non-farm payrolls report.
Majors
Surging global equity markets and easing risk aversion dented demand for “safe-haven” currencies overnight. As a result, the USD plunged against most of the major currencies. As expected, the ECB kept its policy rate on hold at 1% overnight, and extended its unlimited liquidity provisions until April 2011. But those looking for the ECB to unveil an aggressive new bond buying programme were disappointed. President Trichet said he would not comment on the programme “at this stage”.
The knee-jerk reaction in currency markets saw the EUR/USD plunge 1 cent to around 1.3050 and stock markets start the night on the back foot. However, later in the night sentiment brightened noticeably. Reports the ECB was buying Portuguese and Irish sovereign bonds led to a sharp narrowing in European bond spreads, bolstering equity market sentiment and risk appetite generally.
A successful Spanish bond auction also helped allay European sovereign debt fears. Spain raised a total of €2.5b, at a bid-cover ratio of 2.3, higher than the 2.2 achieved at a similar auction in early October. The spread between Portuguese and German 10-year bonds dived over 50bps to 386bps, while the Irish equivalent fell around 45bps to 570bps. European equity markets surged 1.3-2.8% and the VIX index (a proxy for investors’ risk aversion) plunged from 21.5% to around 19.5%.
Reduced fears of European contagion and buoyant risk appetite encouraged traders to trim positions in “safe-haven” currencies like the USD and JPY, for the second day running. Against the broadly weaker USD, the EUR/USD tore higher, recovering all of its early losses and finishing the night above 1.3200.
Meanwhile, the ‘commodity-linked’ currencies tended to outperform, reflecting solid gains in equity markets and commodity prices. USD/CAD skidded from 1.0180 to closer to 1.0020 and AUD/USD climbed from 0.9650 to above 0.9750.
Last night’s US data continued the improving tone evident in recent weeks, helping US stocks close up 0.8-1.1%. Jobless claims for the week ending November 27 registered a small increase, but traders were more interested in a surprise 10.4%m/m surge in October pending home sales (-1.0% expected).
Ahead of tonight’s all important US non-farm payrolls report, support on the USD index is expected around 79.60 with heavy resistance eyed on rallies towards 81.00.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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