Safe havens outperform as Brexit nerves hit markets; NZD/USD sits at 70c, global risk appetite will likely remain the primary driver of the NZD

By Kymberly Martin

The JPY and CHF have outperformed a strong USD. The NZD has underperformed, though unsurprisingly the worst performer has been the GBP.

Currency performance continues to primarily reflect risk aversion and market fear of ‘Brexit’. Our risk appetite index (scale 0-100%) has slumped to 0.36%, its lowest level since the market turmoil of February/March. The market seems unsettled by the series of polls that now show U.K voters favour the ‘Leave’ camp in next week’s referendum. The GBP/USD has tumbled further to trade just above 1.4100 currently.

The USD has benefitted from the flight from European currencies and ‘risk sensitive’ currencies such as the AUD and NZD. The USD index has strengthened steadily overnight, driven more by general risk aversion than the delivery of solid US retail sales data. The ‘safe haven’ JPY is also a little stronger. The USD/JPY trades at 106.00 currently.

The NZD/USD has traded lower to now sit at 0.7000. The NZ TWI also now sits more than 1.3% below its June highs. The direction of this move will please the RBNZ, although the trade-weighted index still remains well above the Bank’s projections for the coming quarter.

Global risk appetite will likely remain the primary driver of the NZD up until there is further clarity on the UK referendum. However, three events in the coming 24-hours, or so, have potential to impact on the NZD.

First, the latest GDT dairy auction is scheduled for the early hours of tomorrow morning. We see potential for a slight further lift in prices.  This would not be sufficient, in itself, to curtail downward momentum in the NZD, but would, at least, not add to it.

Soon after, the US FOMC will meet. We see little chance of the Fed promoting expectation of imminent Fed rate hikes, or significantly bolstering the USD. Once again this may provide the NZD with some reprieve.

However, also look out for the release of NZ GDP tomorrow morning. We look for a 0.3%q/q (2.4%y/y) outcome. This is slightly below consensus (and RBNZ) projections. If delivered, this could see the NZD under a bit more downward pressure (even as we believe GDP growth will be solid in Q2 and H2).

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