Worries about Fed hikes has stocks on back foot. Eyes now on Asia. ECB pondering larger rate cut in December. NZD in no-mans land

By Raiko Shareef

Major currencies recovered very modestly against the USD over the past 24 hours.

NZD squeezed higher, but is capped at 0.6580. Investors are more focussed on the overnight sell-off in equities.

The moves in currency markets have been less than inspiring. G10 currencies are flat to slightly higher, retracing a little of their post-payrolls losses. Much was made of the lack of any retracement late in the New York session on Friday. It looks to have arrived a day late.

European and US equity indices have seen their sharpest one-day falls in a month, but for differing reasons. In Europe, the concern appears to stem from the soft set of Chinese trade data over the weekend. We’d also suggest some paring of ECB easing expectations might also be reducing the attractiveness of European equities.

In the US, a delayed reaction to the prospect of US rate hikes (and worries about the pace of delivery, if December really is the start day) has stocks on the back foot. The Euro Stoxx 50 closed 1.4% lower, while the S&P 500 is currently down by 1.3%. We’ll be watching how this affects Asian risk markets this morning.

EUR’s rally was briefly curtailed by a Reuters article suggesting that the ECB was mulling a sharper rate cut in December than the market has priced. Citing unnamed ECB Governing Council members, the report suggests that the debate now is about the magnitude of the cut to the deposit rate, currently at -0.2%. A 0.1% reduction is effectively priced in.

On the other hand, we’d note an uptick in investor concern that the fall in EUR/USD to date, from 1.15 just a month ago, might reduce the scale of easing the ECB feels compelled to deliver. The market still very much expects a cut to the deposit rate and an expansion or extension of the QE program.

NZD/USD pushed higher during our session yesterday, after a sharp lift in local interest rates. The squeeze ran out of steam ahead of the 50-day moving average at 0.6580, and we expect this to provide good resistance on  the day. The higher volatility associated with last night’s equity market slip should help keep a lid on NZD. We went short NZD/USDon Friday, from 0.6610, with our year-end target of 0.62 in mind.

Today’s NAB survey in Australia will be a highlight, and may helped NZD/AUD find a new range, currently caught in no-man’s-land between 0.92 and 0.93. China’s CPI report later will also be watched closely. Signs of weakness, afterSunday’s trade data and ahead of tomorrow’s activity data, won’t be looked on kindly.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.