Kiwi$ falls to 74 USc on Euro debt worries, higher US interest rates

Kiwi$ falls to 74 USc on Euro debt worries, higher US interest rates

By Mike Jones

The NZD/USD has shed close to a cent over the past 24 hours, falling from 0.7520 to around 0.7420. In doing so, the NZD took out the title of weakest performing currency.

A broadly stronger USD has been the main theme in currency markets over the past 24 hours. Yesterday morning’s FOMC statement contained few surprises. The Fed’s cash rate and quantitative scheme were both left unchanged as expected. But the Fed’s failure to express concern over the recent surge in US interest rates saw US bond yields continue to press higher in the wake of the release, imparting fundamental support to the USD.

Overnight, the USD extended its gains. Not only did European debt jitters encourage “safe-haven” demand, but US industrial production and manufacturing figures exceeded analyst expectations. Before long, the broadly stronger USD had shaved around a cent off all of AUD/USD, EUR/USD and NZD/USD.

However, there were a couple of extra negatives in the mix for the NZD. First, NZD/AUD fell below 0.7500 for the first time since 2000, amid ongoing selling interest from momentum and speculative type players. Second, NZ-US 3-year swap spreads slipped to the lowest level since April, undermining yield support for the currency.

Not even a solid result from last night’s Fonterra milk price auction could prop up the ailing NZD. Prices rose 2.4% relative to the previous auction, supportive of Fonterra’s recent decision to lift its milk price forecast to $6.90/kgms.

We said early in the week that sliding NZ-US interest rate differentials suggest NZD/USD will struggle to sustain rallies above 0.7600 in the short-term. We continue to favour the downside in the near-term. Look out for a daily close below 0.7400. Technically speaking, this would signal the emergence of a new downtrend.

For today, keep an eye on local event risk in the form of the December NBNZ business survey and Westpac consumer confidence survey.

Majors

The USD strengthened against most of the major currencies overnight, reflecting both upbeat US data and increased “safe-haven” demand.

The reaction to yesterday morning’s FOMC statement was unusually subdued. In some ways this was not surprising given the statement looked essentially like a reprint of November’s missive.

The FOMC again expressed concern over high unemployment and the “trend down” in US core inflation. The Fed’s cash rate and US$600b asset purchase programme were kept unchanged as a result. Still, US bond yields continued to climb in the wake of the statement, perhaps reflecting the Fed’s failure to acknowledge the near 90bps surge in yields since the last statement. 10-year Treasury yields hit a 7-month high around 3.5%.

Overnight, worries about European debt strains returned to the fore. European stocks and the EUR fell after ratings agency Moody’s placed Spain’s Aa1 rating on review for a possible downgrade. Moody’s cited concern about rising Spanish borrowing costs and potential losses in the banking system.

Some good news on Europe limited the fallout. Parliamentary support for Ireland’s €85b EU-IMF bailout was confirmed and Portugal successfully issued €500m of short-term debt. EUR/CHF fell to a fresh all-time low around 1.2760, helping drag EUR/USD from above 1.3350 to around 1.3270. Meanwhile, European stocks recorded declines of between 0.2% (UK) and 1.5% (Spain).

But it wasn’t just EUR on the back-foot. A broadly stronger USD knocked most of the major currencies lower. Indeed, USD/JPY rose from 83.70 to almost 84.10. Not only did equity market weakness encourage “safe-haven” demand, but last night’s US data was actually fairly encouraging.

Industrial production rose 0.4% in November (0.3% expected), core inflation came out broadly as expected, and the New York Empire manufacturing index jumped from -11.14 to +10.57 in December (+5 expected). Having initially been dragged lower on “safe-haven” buying, US bond yields reversed course to end the night broadly unchanged.

Looking ahead, investors’ focus looks set to remain on Europe. European PMIs and UK retail sales will be released tonight. But the bigger event risk will come from a European leaders meeting. Investors are hopeful fresh steps to tackle the European debt crisis will be announced.

* Mike Jones is part of the BNZ research team. 

All its research is available here.

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11 Comments

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Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.

Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can't really be that bad. The trend is your friend ... until it ends. Look at the bond markets just a few months before World War I. There was no sign of an impending war. Everyone "knew" that cooler heads would prevail.

Look back now and see where we made mistakes in the recent crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. etc.

Beware...the dominoes are lining up for our fair country of NZ and part 2 of the "new normal" is having it's suit fitted as we speak?

Bang on Rob....I expect the spin and BS economy to plod on off the edge of the cliff...can't be long now....govt splurge rising to $350oooooo a week at a time when Mr Market is sharpening his blade...hate to be in debt right now...bad enough trying to protect my savings against NZ govt managed debasement of the dollar and at the same time being free to leap to safety on the next collapse.

But wait...I haven't finished !

In theory, the Fed's purchases of Treasury debt are absurd. In practice, they have backfired. So, the Fed will do more of them. Makes sense, right?

The US bond market could be signaling that it is headed the way of Greece, Ireland, and Lehman Bros. Who wants an IOU from someone who can't pay it back? Once the selling begins, it is hard to stop. Interest rates go up, increasing the cost of financing for the debtor. Pretty soon, he can no longer fund his on-going expenses or make the payments on his debt. He is forced into bankruptcy.

Meanwhile, the latest numbers from Robert Shiller tell that the US stock market is 33% overvalued. The guess is that stocks will go down much more than that number implies. Markets tend to overshoot in both directions.

And the latest news from China tells us the Middle Kingdom could blow up at any time. Nearly half the GDP is spent on capital improvements (usually things that involve concrete and steel). It's breathtaking to see it. But there's no way you can make that many capital investment decisions without making some colossal blunders.

And from Europe comes a bleak and foreboding assessment: European banks have five times as much government debt as they did 3 years ago...and even US banks have nearly $350 billion worth of debt from Europe's wave-washed periphery. Investors are selling off Spanish bonds; another chapter in the debt crisis could be at hand.

Dear www.interest.co.nz reader, you are faced with a grave and dangerous situation. In front of you is the Valley of Death for investors.

America's stock market could crash at any moment. Its bonds are slipping. Its homes are sinking. China could collapse into a heap. Europe could come unglued. Trade could fall off a cliff. Interest rates could rise everywhere. Another great depression could be coming soon...even Wolly can sense it like an old bull in a field?!

And yet, CEOs are optimistic, says one report. Investors are overwhelmingly bullish, says another. And your captains are telling you to "charge ahead.....what's the story, morning glory?

Excellent summary Rob and Wolly.

Trends are non-linear because human decisions are driven as much by emotions as by logic. The classic fear v greed. Therefore the rules of tipping point apply. Up the escalator, down the elevator.

For this reason it is absolute madness, bordering on gross negligence, that Mr Key, who should have the expertise to know much better, is borrowing $300m p.w.

   It's called Systamatic Structural collapse.Under globalisation,their has to be an equalisation of cost and wages.Those who's wages are collapsing,first deny that their plans and dreams are in jepardy.With acceptance comes depression or anger.The laugh is that if a Country can feed itself the rest is BS. But we are Brainwashed So... In this denial period you can keep off the Depression or anger,by borrowing to maintain the "Dream"..But now the World is just about borrowed to the limit..the debt is componding.The Anger is building.The future wont go away.

Lots of theory, but hardly news is it?  Potential has been on the cards for how long... its just a matter of when.  Put the theory to work and make the most of it! Bring back the 2008 heady days of 50 cents against the $US!  I'm hoping you fellas are right, those $US might just be worth something again after all!

Great stuff Rob & Wolly,every day I shake my head with disbelief when I read that things are on the mend and everything will be back to normal soon, if you saw the disbelief on the face of the reporter interviewing the the economist yesterday who was predicting hyper inflation for the states. You could see her thinking "This man is talking rubbish"Many of those journalists see the world through rose tinted glasses.

Here in New Zealand we have a ticking time bomb, large numbers of kiwis have borrowed to hilt to buy a house with first and second mortgages then they have gone down to Harvey Norman and filled up their new house with goodies all on 3 year no deposit, great stuff!  They come away with their shiny new GE card. Three years later : now how do I pay for it, just repay GE over another few years. Now they are overloaded with debt, better sell the house but hang on  cant sell it.. Along comes GE again holding the the First mortgage, we will sell your house for you. Result big deficit and borrower still has lots of debts.

The main banks were bad enough with their 90 % lending but then we had all the second tier lenders making lots of money with 100% lending. They were all to blame "Willing buyers willing sellers"

There must be a day of reckoning

Meanwhile, what do we have on the news every night lately?

Yay!! Oprah is in Australia. Yay!!!!

She's so important that they named a building in her honour , the Sydney Oprah House .

I heard she(Oprah) was  held up at Aust.Customs....... for being in possession of more than 50 Lbs of Crack...........yo Mama.

Do we hear squealing from the Pigs ? ........ No , not the European PIIGS ....... But those banker pigs from across the ditch ! The easy credit they sunk into GodZone , to blow up our property bubble , is getting a haircut . ........ Do they raise interest rates in NZ , to recoup their losses , make the Kiwi peasants pay  ?

 Profits repatriated back to that great land , girt-by-sea , are gonna look a tadge aenemic this earnings reporting season .

Squeal little piggies , squeal .............. Aha ha de ha ha !