By Mike Jones
The NZD/USD has spent most of the past 24 hours consolidating inside a relatively tight 0.7560-0.7620 range.
Financial market sentiment brightened noticeably overnight after a successful Portuguese sovereign bond auction soothed worries about spiraling European funding costs. Global equity markets surged, commodity prices tracked higher, and the VIX index (a proxy for risk aversion based on the volatility of the S&P500) dived from 17% to below 16.5%.
In currency markets, easing tensions about the European crisis were reflected in a bout of EUR short covering. EUR/USD soared back above 1.3100 and NZD/EUR was slammed from above 0.5850 to around 0.5800.
Rebounding risk appetite encouraged investors to trim positions in “safe-haven” currencies like the USD and JPY in favour of “growth-sensitive” currencies like EUR, AUD and CAD. Notably, the NZD/USD failed to share in the upbeat sentiment. While the reason for the NZD’s underperformance is difficult to pinpoint, heavy selling of NZD/EUR and NZD/AUD most likely played a part in limiting the NZD/USD’s gains to the 0.7610/20 region.
Still, it’s worth noting, commodity prices globally continue to surge, indicative of strengthening fundamental support for the NZD. The CRB index (a broad index of commodity prices) lifted 1.3% to a fresh 27-month high overnight and oil prices again flirted with US$92/barrel. Corn and soybean prices also jumped to 30-month highs overnight amid USDA reports of dwindling global stocks.
Looking ahead, near-term direction in the NZD/USD is expected to continue to come from gyrations in offshore risk appetite. However, there are still some local events to watch out for today. As always, Australian employment figures (1:30pm NZT) have the potential to spur volatility in the AUD. NZ electronic transaction data, QV house prices and the ANZ commodity price index will also be worth keeping an eye on.
A rebound in investors’ risk appetite sapped demand for “safe-haven” currencies overnight. As a result, the USD weakened against all of the major currencies.
A Portuguese €1.25b sovereign bond auction was the focus for markets overnight, given mounting concerns Portugal would be next in line to ask for an EU/IMF bailout.
In the event, the auction was regarded as a success. Overall demand was strong and the 10-year note fetched a yield of 6.72%, well below the 7% regarded as unsustainable. The associated cooling in European sovereign funding concerns provided a boost to investors’ risk appetite, sending equities, commodity prices, and the EUR roaring higher.
European stocks soared. The DAX rose 1.8%, the CAC 40 increased 2.2% and the broader EuroStoxx 50 jumped nearly 3%. EUR/JPY climbed from 108.00 to nearly 109.00 and the EUR/USD lifted around 1.5 cents to 1.3100.
Sentiment towards the EUR was further bolstered not only by EU Commission calls to expand the €440b EFSF, but also some upbeat economic data. Eurozone industrial production figures for November came in well above analyst forecasts (1.2%m/m vs. 0.5% expected).
With the stronger EUR and generally buoyant risk appetite paving the way for a broadly weaker USD, most of the major currencies were soon tracking higher. GBP/USD climbed almost 1.5 cents to 1.5750, despite more evidence of sluggish UK economic momentum (the November trade balance widened to a record high of £4.1b). USD/JPY slipped from 83.40 to around 83.00 and the CAD surged to a 2½ year against the greenback of almost 0.9850.
Looking ahead, there is plenty of event risk crammed into the rest of the week. Today brings Australian employment, policy announcements from the Bank of England and ECB, and US jobless claims. Tomorrow night the focus will return to the US data calendar with US retail sales, industrial production, CPI, and consumer confidence data all due. Aside from data developments, there will also be plenty of attention on sovereign bond auctions from Spain and Italy tonight.
Further evidence of improving global growth and easing European sovereign funding concerns would likely take a further toll on the USD. Near-term support on the USD index is eyed towards 79.50, with deeper support seen towards 78.90.
Mike Jones is part of the BNZ research team.