By Mike Jones
After flirting with 3-year highs near 0.8000 this time yesterday, the NZD/USD has spent the past 24 hours on the back foot. Yesterday’s more benign than expected inflation figures, and a spike in risk aversion overnight have together shaved around a cent off the currency.
According to yesterday’s CPI figures, annual inflation surged to 4.5% in Q1 from 4.0% in Q4. Still, as high as it was, there was little in the numbers to worry the RBNZ, with measures of underlying inflation seemingly well contained for now. Moreover, the headline number was a touch weaker than we and the market expected.
The associated paring of RBNZ rate hike expectations weighed on the NZD. The NZD/USD slipped around ½ cent to 0.7920 and NZD/AUD skidded from 0.7580 to 0.7520 as leveraged and momentum traders exited long positions.
Overnight, the NZD’s woes continued, this time pressured by a sapping of global risk appetite. Not only did rumours of a Greek debt restructure continue to circulate, but ratings agency S&P revised the outlook on the US government’s AAA rating to negative, sending markets into a tailspin. Global stock markets notched up heavy losses, commodity prices fell sharply, and our risk appetite index (which has a scale of 0-100%) fell back to 68.6%, having started the week above 73%.
Led by a weaker EUR/USD, the NZD/USD was dragged back below 0.7900 as investors sought out the relative “safe-haven” of currencies like the JPY and, rather perversely, the USD. NZD/JPY slumped nearly 2.0% to below 65.50.
We noted yesterday we expect the NZD/USD will struggle to make significant topside progress this week. And, in the near-term, we see scope for the losses in NZD/USD to continue. Not only has rising risk aversion knocked some of the momentum out of the currency, but we may well see speculative and leveraged accounts take profit on long NZD and AUD positions heading into the Easter break.
In the short-term, support on NZD/USD is seen towards the overnight low of 0.7840. Sellers are expected to emerge on any bounce towards 0.7990, with deeper resistance eyed around 0.8030. There is no local data due for release today, but keep an eye on the April RBA minutes due at 1:30pm (NZT) and the HSBC Chinese PMI at 2:30pm.
The USD and JPY strengthened against all of the major currencies overnight, as a spike in risk aversion encouraged demand for “safe-haven assets”.
The first part of the night was all about a weaker EUR. In fact, investors looking for a reason to sell the single-currency were spoilt for choice. Not only did a Greek newspaper report that Greece had formally requested IMF and EU help in restructuring its sovereign debt, but a German government official said Greece was unlikely to make it through the summer.
A poorly received Spanish debt auction only added to sovereign debt fears. Spain’s 12 month cost of borrowing rose to 2.8%, from 2.1% in March, with the bid-cover ratio falling from 2.4 to 1.6. European stocks tumbled 2.1-2.4%. Meantime, broad-based EUR selling saw EUR/JPY slide from 120 to below 118.50 and the EUR/USD shed around a cent to 1.4300.
Later in the night, the spotlight returned to the US after ratings agency S&P revised the outlook on the US’ AAA sovereign rating to negative. US sovereign CDS spreads ticked up 7bps to 50bps in response (compare this to 1150bps for Greece). Financial market sentiment nose-dived. Commodity prices and stocks plunged as investors quickly reassessed their risk appetite.
The S&P500 is currently down around 1.1% and crude oil prices have fallen over 2%. The VIX index (a proxy for risk aversion) jumped from 15% to above 18.5%. Against a backdrop of rising risk aversion, demand for “safe-haven” assets returned.
Rather perversely given the ratings outlook downgrade, this spurred gains in US Treasury bond prices and the USD. The JPY and gold prices also made large strides thanks to their “safe-haven” allure. Against the broadly firmer USD, the EUR/USD continued on a path southwards, finished the night around 1.4250. AUD/USD lost around ½ cent to 1.0520 and USD/JPY skidded from 83.20 to around 82.60.
Fixed Interest Markets
In the wake of yesterday’s softer NZ CPI reading, NZ 2-year swap yields fell back to 3.39% from 3.46% at the end of last week. Meanwhile, 10-year swap yields slipped from 5.49% to 5.42%. Still, 10-year yields remain at higher levels than a week ago, and 2-year yields are back up to levels seen immediately post the Christchurch earthquake. It looks to be a relatively subdued week heading into the Easter break.
However, Thursday’s release of NZ credit Card Spending data and ANZ-RM Consumer Confidence will provide important detail on how consumer activity and sentiment is recovering post the Christchurch earthquake. Further signs of resilience may tilt the market towards pricing a more aggressive RBNZ rate path, which would suggest yesterday’s rally may be reversed in due course.
For today, the 3-5bps overnight falls in US Treasury yields suggest local swap yields will open up under downside pressure.
Mike Jones is part of the BNZ research team.