By Mike Jones
The NZD/USD has spent the past 24 hours trading choppily within the familiar 0.7570-0.7630 range.
Early in the night, the NZD was weighed down by a mild paring in investors’ risk appetite. Not only was yesterday’s Chinese trade data fairly uninspiring (the December trade balance fell to US$13.1b from US$22.9b), but fears over the health of the Eurozone continued to percolate amid reports Portugal is next in line for an EU/IMF sovereign bailout. Global stock markets spent the night in the red and our risk appetite index (which has a scale of 0-100%) slipped from 74.3% to 72.5%.
Against this backdrop, investors sold “growth-sensitive” currencies like the AUD and NZD in favour of the relative “safe-haven” of the JPY and USD. NZD/JPY skidded from 63.20 to around 62.90, dragging NZD/USD below 0.7580.
However, the NZD/USD was soon heading higher again. Global stocks and commodity prices clawed back part of their early losses, bolstering demand for ‘commodity-sensitive’ currencies like the NZD/USD.
Further gains in NZD/AUD also supported the late NZD/USD rally. However, with NZD/AUD now closing in on 0.7700, it is starting to look overstretched according to our short-term valuation model. The model currently estimates a 0.7400-0.7600 “fair-value” range, suggesting additional gains will be harder fought in the absence of clear improvement in the model’s drivers (NZ-AU 3-year swap spreads, NZ-AU commodity prices and NZ-AU business confidence).
An absence of key US economic reports suggests the NZD will take its cues from the plethora of domestic economic news this week. Hot on the heels of yesterday’s merchandise trade figures, today brings the NZIER business opinion survey and November building permits data (due at 10:00am and 10:45am respectively). Initial headwinds are expected on NZD/USD rallies towards 0.7680, with support likely to be found on dips towards 0.7580, and then 0.7530.
Overall, there was little fresh direction for currency markets overnight. The USD is slightly weaker against most of the major currencies.
Risk appetite generally was dampened by ongoing European sovereign debt jitters. Various news reports suggested Portugal is under pressure from Germany, France and other Eurozone countries to seek EU financial aid.
Speculation an EU/IMF bailout will soon be needed for Portugal saw European stocks slide 0.5-1.6% and the EUR start the week on the back foot. Indeed, the EUR/USD slipped to fresh 4-month below 1.2880 yesterday morning, before recovering slightly overnight. Portuguese sovereign bond spreads initially tracked wider, before narrowing amid market chatter of heavy bond purchases by the ECB.
Yesterday’s Chinese trade data also presented something of a road block for investors’ risk appetite. The December trade balance undershot expectations by a clear margin (US$13.1b vs. US$20.8b expected) as export growth throttled back to ‘just’ 17.9%y/y. Worries about a slowing in Chinese growth saw the Shanghai composite equity index fall 1.7%, weighing on commodity prices and ‘commodity-linked’ currencies like the AUD and CAD. Copper prices were down almost 1.9% at one stage during the night.
Reflecting the generally dour sentiment, the S&P500 opened down around 0.6%, before paring its losses on the back of reports of increased M&A activity. The S&P and he Dow Jones index are currently both down around 0.3%. The VIX index (the implied volatility of the S&P500) rose from 17% to 18%, suggesting a modest increase in investor risk aversion.
Along with the ‘commodity currencies’, the GBP was one of the weakest performers of the night reflecting yet more uninspiring UK economic data. UK house prices fell 1.3%m/m in December according to Halifax (-0.4% expected), dragging GBP/USD briefly below 1.5500.
Looking ahead, we suspect the EUR will remain heavy this week as investors continue to fret about the ability of peripheral states to fund themselves. There’s plenty to watch out for on this front this week with Portugal due to auction 2014 and 2020 bonds on Wednesday, Spain auctioning 2016 bonds on Thursday and on the same day Italy due to auction 2026 government bonds. Initial EUR/USD support should be found on dips towards 1.2870 with headwinds expected ahead of 1.3000.
Mike Jones is part of the BNZ research team.