Falling risk appetite on back of fresh Euro concerns hits commodity currencies. More weak US data.

By Mike Burrowes and Kymberly Martin

In the backdrop of a very strong USD overnight the NZD lost ground, along with all other major currencies. USD strength was driven by a surge in risk aversion given fresh European debt issues. The NZD/USD fell from 0.8160 to 0.8060.

Locally, yesterday’s data was fairly encouraging, illustrating the ongoing domestic economic recovery. Q1 retail volumes rose 0.9%, at the top end of expectations. This was in spite of a 2.2% decline in the quake affected Canterbury region.

The data was consistent with the strong recovery in consumer confidence recorded in June, according to the ANZ-RM survey (that was released a day earlier than originally planned).The rose to 112.5 from 103.3 in May. Despite these positive local developments, the NZD submitted to global influences over the past 24hrs. It fell in the backdrop of declining risk appetite (our risk appetite index fell from 65 to 58%) and falling commodity prices.

The AUD was also under pressure falling 1.3% over the past 24hrs. However the NZD/AUD fell sharply yesterday afternoon to around 0.7620 after comments from RBA Governor Steven suggesting further rate hikes were not far off. The cross then traded sideways overnight before clawing back some of its losses to trade around 0.7630 this morning.

Relative to the ailing EUR, the NZD made solid headway overnight trading up from 0.5650 to 0.5690.

This morning’s Fonterra milk auction showed a 2.6% average decline from the previous auction, with prices remaining 9% up on the year. The results failed to grab investor attention given the strong global developments at play.

Global risk appetite will continue to be a key driver of the NZD today.  Locally we will see the release of the business NZ PMI and manufacturing activity data.

Majors

The USD has surged higher across the board, led by a collapse in risk appetite. This has seen the “safe haven” USD, CHF and JPY outperform, while the EUR and Scandinavian currencies have been the worst performers.

The collapse in risk appetite has been widespread. In equities, the S&P500 is currently down 1.9% and the Euro Stoxx 50 is down 1.75%. Commodity markets are down heavily as well, with the CRB (broad index of global commodities) dropping 1.5%. The VIX (a proxy for risk aversion) has surged from around 18.5 to 20.65.

Again the Greek debt crisis took centre stage in markets. Greek Prime Minister Papandreou proposed forming a national unity government on the condition it supported EU/IMF bailout plans. In addition, investors remain very concerned that private bondholders will be forced to take losses if there is a second rescue package for Greece.

As if this was not enough to swallow in one evening, ratings agency Moody’s threatened large French banks with possible downgrades. Moody’s also warned it was reviewing the ratings of subsidiaries of some Portuguese banks for possible downgrades.

This has seen the EUR/USD fall from around 1.4450 down to 1.4150 currently – roughly a 1.9% decline over the past 24 hours. Sentiment towards the EUR will stabilise once there is a clear and credible solution to the Greek debt crisis. This has not been forthcoming for Eurozone political leaders so far.

Risk sentiment took another leg lower on the open of US markets. US CPI for May was stronger-than-expected (0.2% vs 0.1% m/m expected), while the NY State manufacturing activity for June was weaker-than-expected (-7.79 vs 12.0 m/m expected). This data suggests the US is facing the troubled mix of higher prices and weak growth. However the USD responded to the rise in risk aversion, as opposed to reacting to the negative US data. The USD index rose from around 74.40 to 75.50 – a 1.50% rally.   

The risk sensitive AUD, CAD and NZD have collapsed 1.30%, 1.20% and 1.75% respectively over the past 24 hours. Despite the large falls, these currencies have remained slightly better supported than European currencies as investors are more concerned with the Greek debt crisis.

Looking ahead, investors are likely to remain fixated on the situation in Europe. In this regard, the German Chancellor Merkel and French President Sarkozy are due to meet Friday. In addition there is a EU finance ministers meeting set for June 19. In terms the data due, tonight we have UK retail sales, Eurozone CPI, US current account balance and the US Philadelphia Fed survey.  

Fixed Interest Markets

NZ markets were relatively quiet ahead of strong rallies in off-shore bond markets as the European debt situation deteriorates.

NZ swap markets yields moved a little higher across the curve yesterday, in the backdrop of supportive local data releases. 2-year swaps traded up to 3.37% and 10-year to 5.11%, but remain below the levels they traded at prior to Monday’s Christchurch aftershocks.

There was little movement in the bond market yesterday. The yield on 21s inched off recent lows to around 5.04%, while the yield on the new 23s ticked up to 5.18%. The DMO has announced its tender for the week at 100m 13s, 15s and 23s. As was seen last week, demand is likely to remain high relative to the limited offer, suggesting yields will remain contained.

US 10-year yields fell sharply back toward previous lows overnight around 2.96% as global risk aversion took hold. Similarly German bunds declined back to 2.95%. Risk sentiment plunged as emergency talks between European finance ministers yesterdays failed to reach agreement on the Greek debt situation. Greek 2 and 5-year bond yields soared to new highs of 26% and 20% respectively. Contagion to Irish and Portuguese bonds was also apparent.

This global backdrop will continue to exert downward pressure on NZ long yields today. Today’s business NZ PMI will give further evidence of the pulse of the local economy.

See our interactive swap rates charts here and bond rate charts here.

Mike Burrowes and Kymberly Martin are part of the BNZ research team. 

All its research is available here.