By Kymberly Martin
The JPY continues to significantly outperform its peers. The NZD has had a fairly turbulent night but remains remarkably resilient in the face of weak global risk appetite.
Yesterday’s better mood in markets has proved a short hiatus. Risk sensitive assets are again under pressure.
The Euro Stoxx 50 has closed down 3.9%, led by financial sector companies.
Financials are also leading declines in the US where the S&P500 is down almost 2%. Credit spreads and peripheral European sovereign bond spreads have also pushed wider.
Strength of the JPY remains the most eye-catching move in currency markets. In volatile trading overnight, the USD/JPY slipped as low as 111.00 before returning to its current level around 111.70.
Still the USD/JPY has declined more than 8% this month, confounding the view that the JPY would depreciate in the face of BoJ easing as the US Fed moved to a less accommodative path. The JPY’s perceived ‘safe haven’ status appears the overriding driver in current anxious markets.
The probability of official intervention in the currency is rising. Earlier a Japanese finance ministry official had said policy makers were watching JPY moves to assess whether they were speculative. The BoJ last intervened in the currency in 2011. But at that time the USD/JPY was trading down in the mid-70s, as the broad USD was close to its nadir.
The EUR/USD gained a little further ground overnight, now trading at 1.1360. This is its highest level since mid-October last year. But that was not enough to buoy the GBP/USD that remains under pressure. From early evening highs above 1.4550 it now trades at 1.4450.
The NZD and AUD remain remarkably resilient in the face of battered global risk appetite. Traditionally this is an environment in which they would perform particularly poorly, particularly in the face of declining global commodity prices.
However, the decline in global interest rates is serving to increase NZ’s interest rate differential. NZ’s positive growth differential also likely appears more appealing with each data disappointment offshore.
The NZ-US 2-year swap spread has rebounded from around 165bps at the start of the year to 186bps currently. The NZD/USD did briefly dip below 0.6600 overnight but now trades back at 0.6680.
Moves in the NZD/JPY have been quite striking. Overnight, the cross briefly dipped toward 73.20, its lowest level since the ‘flash crash’ of late August last year.
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Kymberly Martin is on the BNZ Research team. All its research is available here.