By Mike Jones
The NZD has been the weakest performing currency over the past 24 hours. A spike in global risk aversion and heavy NZD/JPY selling knocked NZD/USD from 0.7440 to a smidge below 0.7400. Global growth worries flared up overnight.
Not only does the fallout from Japan’s devastating tsunami and nuclear crisis appear to be worsening, but political tensions in the Middle East have shown no sign of abating. Reflecting the less supportive risk appetite climate, global equity markets were pummelled overnight and commodity prices fell.
Our risk appetite index (which has a scale of 0-100%) slipped from 62.5% at the end of last week, to 57.2%. Rising global risk aversion increased the appeal of “safe-haven” currencies like the JPY and USD overnight, at the expense of “growth-sensitve” currencies like the AUD and NZD. As a result, the NZD/USD slipped around ½ cent to 0.7400.
A heavier toll was taken on NZD/JPY thanks to periodic bouts of JPY buying on the back of ongoing rumours of Japanese insurance fund repatriation. After briefly skidding to 6-month lows below 59.60 yesterday, NZD/JPY pared some of its losses overnight.
Looking ahead, in a comparatively light NZ data schedule, tomorrow morning’s Fonterra auction will see milk prices likely remain relatively buoyant, albeit vulnerable to a modest correction.
Meanwhile, this week’s consumer sentiment indices will surely struggle in the wake of the Christchurch earthquake. Overall, we suspect gyrations in global risk appetite will dictate the fortunes of the NZD this week.
According to our short-term valuation model, “fair-value” in NZD/USD currently sits at 0.7100-0.7300. A rough sensitivity analysis suggests that a five percentage point increase in our risk appetite index would be consistent with “fair-value” moving up to 0.7200-0.7400. This suggests that, even allowing for a recovery in risk appetite, there is little fundamental reason to chase the NZD/USD above 0.7500. In the near term, solid support on NZD/USD is eyed towards 0.7325, with initial resistance at 0.7550.
Heightened global risk aversion was the main theme in currency markets overnight. Flight to safety flows saw “safe-haven” currencies like the USD, JPY and particularly CHF, find solid support. Financial market sentiment suffered overnight from fears Japan’s tsunami and ensuing nuclear crisis could derail the global economy. Rising political tensions in the Middle East did nothing to help the mood, as Saudi Arabia sent troops into Bahrain to control rising protest action.
Global growth worries and heightened risk aversion saw world stocks dip to 6 week lows and commodity prices slide. The Nikkei yesterday recorded its biggest daily drop since October 2008 (6.2%).
Overnight, the FTSE dropped 0.9%, the DAX index fell 1.7% and the S&P500 is currently down around 1.2%. Meanwhile, the CRB index (a broad index of global commodity prices) is down around 0.5%. Against this backdrop, investors ditched “growth-sensitive” currencies like the AUD, CAD and NZD in favour of “safe-haven” currencies like the USD, CHF and JPY.
The JPY also found some independent strength from another bout of JPY cross selling, as rumours about repatriation from Japanese insurers continued to swirl. Indeed, from around 82.00, USD/JPY skidded to 4 month lows of nearly 80.50 at one point yesterday, before recovering slightly.
There was relatively little currency reaction to yesterday afternoon’s Bank of Japan policy easing. The BoJ doubled its asset purchase programme to ¥10t and boosted liquidity support for Japanese banks. According to the BoJ, the move was a response to the likelihood of declining output and a worsening in corporate and household sentiment. Japanese government bond yields declined 5-10bps in response.
It’s worth noting, the European currencies (EUR and GBP) managed to mostly withstand last night’s bout of USD and JPY strength. The EUR continued to bath in the afterglow of the surprise deal reached over the weekend to bolster the European sovereign rescue fund.
Meanwhile, a reaffirmation of the UK’s AAA sovereign rating by Fitch provided the legs for the GBP/USD’s climb from 1.6050 to almost 1.6200 overnight. Looking ahead, we continue to look for JPY rallies to run out of steam given the nasty recipe of economic disruption, rising public debt, and BoJ monetary easing.
Moreover, in the short-term, BoJ intervention fears should limit any USD/JPY losses to the 80.00/80.50 region. Tomorrow morning’s (7:15am NZT) FOMC policy meeting looms as the most notable near-term event risk.
Mike Jones is part of the BNZ research team.