Portuguese govt debt hits euro-era high rasing concerns about country's ability to continue servicing its debt

By Kymberly Martin 

The NZD was range bound versus most of its peers overnight after a meaningful move down yesterday morning following the release of weak NZ retail sales data for December. The weakness was apparent in the headlines. December’s sales dropped a seasonally adjusted 1.1% (-1.2% on a core-industry basis), weaker than market expectations.

The retail price index (“deflator”) was certainly subdued. Overall it increased just 0.3% in Q4 (1.9% y/y), while its core component fell 0.1%, an annual increase of a mere 0.7%. Amongst other reasons, there were signs of pressure to discount prices due to a build-up in stocks in the retail sector. As a result, the bulk of NZD/USD weakness occurred yesterday with a modest further decline from 0.7590 to 0.7570 occurring overnight.

Relative to the EUR, the NZD benefited from widespread EUR weakness, based on factors ranging from weak Eurozone industrial production figures to resurfacing sovereign debt concerns. As a result, the NZD/EUR rose from around 0.5595 to close to 0.5620. Relative to the other crosses the NZD traded in a relatively tight range overnight. It traded between 0.7300 and 0.7550 versus the AUD reflecting an absence of significant data releases across the Tasman.

The NZD/GBP traded in a tight range from 0.4710 to 0.4730. The UK CPI figures to be released this evening may be a key indicator for this cross. Consensus expectations are for a 0.1% m/m increase for Jan (4.0% y/y), with any upside surprise likely to put additional pressure on the Bank of England to hike rates even in the backdrop of weak UK growth. Firm indications that the BoE intends to commence its rate hiking cycle could be a key catalyst for a reversal of recent NZD strength versus the GBP, in our view.

There are no key NZ data releases this week, until Thursday when we get the business PMI, producer output prices and the capital goods price index.

Majors

The key driver of currencies overnight was EUR weakness, with the USD a beneficiary. The EUR fell overnight on the back of several issues. First, negative Eurozone industrial production figures were released for December (-0.1% m/m vs. expectation of 0.0%). Second, sovereign debt issues once again came to the fore.

Yields on Portuguese Government debt remained elevated hitting fresh euro-era highs, rasing concerns over the ability of the country to continue to service its debt. Elsewhere, there was talk of Ireland struggling with the terms of its €67.5b bailout, negotiated 2 months ago. The EUR/USD fell from around 1.3560 to close to 1.3480.

The EUR also dragged down the GBP which fell to around 1.6020, having almost touched 1.6080 early in the evening. The USD was the key beneficiary of EUR weakness with the USD index rising from 78.30 to 78.70 overnight. In the absence of US data releases, markets gave attention to the release of the US fiscal budget for 2012. Obama proposed cutting $1100b from the budget deficit over the next decade, distributed 2/3 from lower spending and 1/3 from higher tax revenues.

That said, the administration estimates the fiscal shortfall for 2011 at US$1645b, the largest ever annual deficit. Bond market reaction was muted, with 10 year Government bond yields falling from 3.65% to 3.61%, and 2 year yields fairly stable. In other markets equities had a very subdued performance, being largely flat in both Europe and the US. The VIX index (a measure of risk aversion) also remained stable around 16%. In other currency markets, the JPY came under pressure in the wake of a weak GDP number for Q4.

While Q4 GDP was slightly ahead of expectation, (-0.3% vs. -0.5% expected) the GDP deflator remained firmly in negative territory (-1.6% vs. -1.5% expected) suggesting that deflationary pressures remain firmly in place in Japan.

The USD/JPY index rose from around 83.20 to close to 83.50 before moving back toward 83.30. Today, look out for UK CPI figures that will provide critical information about the interest rate outlook for the UK. In the Eurozone we receive Q4 GDP and the German ZEW survey. A large amount of data is released in the US today including the Empire Manufacturing survey, advanced retail sales and business inventories.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.