NZ$ continues to slide as markets take cover from Euro fears. US slowdown evidence mounts

By Mike Burrowes and Kymberly Martin

The NZD continued on a downward path overnight as risk aversion remained the dominant theme globally. The NZD/USD slipped from around 0.8040 to 0.8000. It was the weakest performing of the major currencies over the past 24hrs.

Our risk appetite index has dropped further to 47%, its lowest level since August last year. Equity markets and commodities also retreated in the uncertain backdrop of unresolved debt issues in Greece and more disappointing US data.

Along with its “commodity-linked” peers (AUD and CAD) the NZD fell despite yesterday’s local data that was relatively upbeat. The Westpac consumer confidence indicator for Q2 reiterated the positive message seen in the ANZ index, rising to 112 from 98 the previous month. The Business NZ PMI also showed a rebound in manufacturing from 52 in April to 54.7 in May. While these data help to consolidate the domestic recovery story, the currency market is clearly focused on global “risk” events at present.

Given the NZD has recently been driven above “fair value” by momentum factors it remains vulnerable to an environment of heightened risk aversion. In this backdrop therefore, the NZD also struggled on the crosses. Despite many of the market’s current concerns being focused on the Eurozone, the EUR held up relatively well overnight with the NZD/EUR falling from 0.5690 to below 0.5660.

While pressure remains on the AUD, the NZD/AUD chopped around overnight. It fell as low as 0.7600 before creeping back toward 0.7620 in the early hours of this morning.

Global risk appetite will continue to be a key driver of the NZD today.  There are no local data releases, but RBNZ governor Bollard speaks to the Wellington chamber of commerce today. While the event is off-the-record there is always the chance of an unexpected comment making its way out.

Majors

The USD has remained well supported overnight as markets continue to fret about the Greek debt saga and contagion into the other peripheral European economies. With risk aversion continuing to rise, the “safe haven” CHF and JPY have outperformed against the USD.

Despite the negative investor mood, FX moves have been much more contained overnight. In equities, the S&P500 is currently down 0.2% and the Euro Stoxx 50 is flat. However, the VIX (a proxy for risk aversion) has surged from around 21.5% to 24.5%. This is the highest level since the Japanese earthquake crisis in March this year.   

The EUR traded with a heavy tone during the evening, but has largely pared the losses during the early hours of this morning. The EUR/USD traded to a low of around 1.4073, but is now back trading around 1.4150. Expect trading to remain whippy as markets jump from one headline to the next.

The CHF brushed-off comments from the Swiss National Bank (SNB) at their policy meeting overnight, noting they are concerned about the strength in the currency and this may force them to revise their inflation outlook lower. At the same time, the SNB left rates unchanged at a record low of 25bps. At this stage, the overwhelming majority of analysts surveyed do not expect the SNB to resume intervening in the currency. Overnight, the EUR/CHF traded to a record low of around 1.1945, but has since reversed some of these losses.   

Early this morning, the USD pared gains made earlier after weaker-than-expected Philadelphia Fed activity for June (-7.7 vs. 6.8 m/m expected). While evidence is mounting of a slowdown in US growth, for now the sovereign debt concerns in Europe are taking centre stage. Should the situation in Europe stabilise, we expect the focus to come back onto the string of recent poor growth numbers out of the US. This could see the resumption of USD weakness.

While not gaining as much attention, UK retail sales slumped in May (-1.6% vs. -0.6% m/m expected). In response, the GBP/USD fell from 1.6160 down to an overnight low around 1.6080, and is down 0.30% over the past 24 hours.

Looking ahead, investors are likely to remain focussed on the situation in Europe. In this regard, German Chancellor Merkel and French President Sarkozy are due to meet tonight. In addition, there is an EU finance ministers meeting set for June 19. On the data front, the focus will be on the US University of Michigan Consumer Confidence survey and Euro zone trade balance.

Fixed Interest Markets

A backdrop of increased global risk aversion saw solid demand for long-dated fixed interest instruments. NZ yields declined in line with their off-shore counterparts.

The DMO bond auction saw tepid demand for 13s, with a bid-to-cover ratio of 0.5x. However solid demand (more than 3x bid-to cover) for longer tenors resulted in the DMO releasing 150m of 23s, 121m of 15s and only 29m of 13s. The average successful bid for 23s was 5.11%, down from 5.26% at the inaugural auction just a week ago.

Global risk aversion remains the key driver of long yields at present. NZ bond yields declined across the curve yesterday by around 7bps for 23s and 4bps for 13s. Significantly, the yield on 21s broke below last October lows. At around 4.99%, their yield is now at levels not seen since March 2009.

The break lower mirrored the continued decline of US 10-year yields. These fell to new lows for the year of 2.90%, in the backdrop of further disappointing US data (Philadelphia Fed) and European sovereign debt woes. (Greek 2-year bonds have reached new highs of 30%)

In NZ swap markets, yields also declined across the board. 10-year swap yields declined by as much as 8bps to close to 5.0%, with 2-year’s slipping another 5bps to around 3.31%. Intraday 2-year yields traded as low as 3.28% testing the bottom of the recent 3.30%-3.50% range. A convincing break lower would see the next technical support level at the 3.15% level reached in May. Given further falls in off-shore yields overnight the market may well try to test near-term supports again today.

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.