NZ dollar starts weaker after Egyptian riots sparks flight to safety away from 'risky' currencies

NZ dollar starts weaker after Egyptian riots sparks flight to safety away from 'risky' currencies

The NZD/USD was the strongest performing currency last week, rising almost 1.4%. A more upbeat statement from the RBNZ on Thursday helped to underpin the NZD, especially in the backdrop of some negative surprises elsewhere, most notably weak UK Q4 GDP (-0.5% q/q versus an expectation of 0.5%).

 

The NZD/USD spent the week on a gradual uptrend, rising from around 0.7600 to a high of just under 0.7800 on Friday. However news and graphic coverage of political unrest in Egypt on Friday night saw the NZD/USD slide to 0.7700, as risk aversion rose.

 

The rise in risk aversion more broadly was reflected in equity market weakness, a spike in the VIX index, and demand for ‘safe haven’ assets such as US 10 year bonds and gold. As a ‘risky asset’ the NZD may come under further pressure early this week, if the situation in Egypt remains unresolved, or deteriorates, sparking fears of contagion in the region.

 

The NZD also gained ground on most of the crosses last week. Relative to the AUD, the NZD rose on Friday afternoon to a 2-month high above 0.7800, before finishing the night below 0.7780.

 

The NZD/GBP ended the week higher, closing at almost 0.4900. Relative to the EUR, the NZD gained on Friday night from around 0.5630 to close above 0.5680. The broad weakening of the EUR late in the night suggests its proximity to the unrest in Egypt on Friday may have taken a toll.

 

The situation in Egypt may well exert further downward pressure on the NZD/USD this week thanks to its status as a ‘risky asset’. It’s a fairly quiet data week locally. Today, building permits and trade balance data will be released, with LCI/QES wage reports and employment data later in the week.

 

Majors

 

The USD strengthened against most of the major currencies on Friday as demand for “safe-haven” assets returned.

 

News of the worsening Egyptian political turmoil sent global financial markets into a tailspin on Friday. European equity indices fell 0.8-1.4%, while the 1.8% fall in the S&P500 was the largest since August. Risk aversion spiked higher. The VIX index (a proxy for risk aversion based on volatility of the S&P500) surged from 16% to nearly 20%.

 

Assets regarded as a ‘safe-haven’ benefited from the general flight to quality. Gold prices rose nearly 2% to above US$1335/ounce and the USD and JPY generally outperformed. Rising Middle Eastern tensions also underpinned oil prices. Crude prices soared over 4% on Friday to around US$89/barrel.

 

While Friday’s commodity price gains bolstered sentiment towards the ‘commodity currencies’ of NZD and AUD, most of the other major currencies fell relative to strengthening USD and JPY. From almost 1.3750, the EUR/USD finished the night around 1.3600, GBP/USD shed nearly a cent to 1.5860, and USD/JPY drifted from 83.00 to closer to 82.00.

 

US economic data released on Friday provided little support for the USD. December quarter GDP figures came in below analysts’ notably robust expectations (3.2% annualised vs. 3.5% expected), albeit with the encouraging growth composition providing some cause for optimism (consumer and business spending both recorded solid gains). US bond yields finished the night down 5 to 10 bps.

 

Looking ahead, there are plenty of events and data to watch out for this week that may help shape currency market sentiment. Friday’s US non-farm payrolls employment report will attract the most attention as usual. Ahead of payrolls, investors will be watching Chinese and European manufacturing PMIs, the US ISM manufacturing index, policy announcements from the ECB and RBA, and a speech from Fed chairman Bernanke.

 

Nonetheless, we suspect investors’ risk appetite will be just as important as ‘fundamentals’ in determining the relative fortunes of currencies’ this week. Any worsening in fears over stability in the Middle East would further dampen risk appetite, providing support for “safe-haven” currencies like the USD, CHF and JPY. Keep a close eye on equity market sentiment for a gauge on investors’ risk attitudes. Near-term support on the USD index is eyed towards Friday’s 77.60 low. Initial resistance is expected on rallies towards 78.50.