Eurozone back in the spotlight with financial rescue package for Portugal expected

Eurozone back in the spotlight with financial rescue package for Portugal expected

By Kymberly Martin

The NZD moved marginally higher overnight versus a broadly stronger USD, with the NZD/USD ending the night close to 0.7420. Risk appetite globally appears to have stabilised with relative calm in Japan, and an absence of new developments in the ever simmering Middle East unrest.

The VIX index (a proxy for risk aversion) has fallen from its Japan crisis high of close to 30%, back to a more ‘normal’ 19%. In this backdrop, the NZD and AUD both made modest gains overnight, helped by the strong rebound in commodity prices over the last few days, which sees the CRB global commodity index back close to previous highs. The NZD/AUD slipped lower, to end the night around 0.7320.

Yesterday’s, Q4, NZ current account deficit was in line with our expectations at 2.3% of GDP. The headline current account is expected to improve further in Q1, as additional reinsurance money flows in following the 22 February earthquake. These flows are expected to push the current account into surplus over the coming quarters.

In Europe, the EUR struggled in the backdrop of resurfacing European debt worries, and weak industrial orders.

The GBP failed to withstand the strengthening USD after BoE minutes showed that the vote remained 6-3 in favour of leaving the cash rate at the historically low 0.5%. In the backdrop of broadly weaker European currencies, the NZD/EUR rose from around 0.5220 to above 0.5250, while the NZD/GBP moved up from 0.4520 to 0.4570. After the previous week’s drama, the NZD/JPY is back to range-trading.

Overnight it fluctuated between 59.700 and 60.00, ending the night around 60.00.

The local focus for today will be the Q4 GDP release. We forecast a modest gain of 0.2% (consensus 0.1%). Despite it being backward looking data, a negative outcome would likely weigh on the NZD/USD, in the near term.

Majors

It was a relative quiet night in currency markets. The USD was slightly stronger with the European currencies the weakest performers. The “commodity- linked” AUD and NZD, showed the strongest performance. Risk appetite appears to have stabilised with the VIX index (a proxy for risk aversion) back at 19%. Equity markets showed modest gains in Europe while the S&P500 is close to flat, with the materials sector being the strongest performer, rising over 1%.

Commodity prices were stable at high levels overnight after their strong rebound in the past few days. The oil price was also relatively stable at high levels, underpinned by bubbling Middle East tensions.

The EUR was heavy overnight given resumed focus on European debt woes. There is speculation that the ECB’s reluctance to intervene to curb rising yields for indebted nations, ahead of the EU summit on 24-25 March, suggests a financial rescue package for Portugal is imminent.

In addition, European industrial new orders for January disappointed at 0.1%m/m (1.0% expected), while Eurozone consumer confidence for March was close to expectation at -10.6. The EUR declined from an overnight high above 1.4200 to close to 1.4120. The USD traded slightly firmer in the backdrop or EUR weakness, despite disappointing data showing home sales declined 16.9% in February (2.1% expected) indicating that US housing woes are far from over.

Comments by Fed Chariman Bernanke to bankers in San Diego did not touch on the wider economy, but instead on the effect of new financial regulation on large and small banks, saying, ‘A financial system dominated by too-big-to-fail firms cannot be a healthy financial system’.

The US index ended the night around 75.80 from around 75.50. The release of BoE minutes showed the vote remained at 6-3 in favour of keep rates at 0.5%.In announcing the Budget, the Chancellor of the Exchequer, revised UK 2011 growth lower to 1.7% from 2.1% previously.

The GBP/USD was the weakest performer, declining from 1.630 to 1.6240 “Commodity-linked” currencies like AUD and NZD made modest gains overnight thanks to stabilisation in risk appetite and the recent rebound in commodity prices. The CAD also held up relative to the USD. The AUD finished the night around 1.0140, rising from around 1.0080.

The JPY has fallen from the lime light. THE USD/JPY was relatively range bound between 80.80 and 81.00, finishing the night close to 80.80.

Looking ahead, we get PMI data from the Eurozone this evening, with retail sales from the UK. Along with the weekly initial jobless claims the US will release durable goods orders tonight.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.

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