– NZD: Surprisingly weak unemployment data causes a NZD collapse
The NZD fell sharply this morning after unemployment unexpected jumped in to a 13-year high, reviving speculation about an RBNZ rate cut. New Zealand’s Q3 unemployment rate rose to 7.3%, from 6.8 percent the previous quarter. Consensus was for a dip to 6.7%. We took profit on our long NZDUSD trade recommendation yesterday at 0.8262 locking in a profit of 1.75%. The NZDUSD dropped to $0.8180, from around $0.8250 before the figures and Wednesday’s late $0.8272. It had hit a five-week peak of $0.8310 overnight before backtracking. We maintain a short NZDCAD trade recommendation targeting a move to 0.7970. This trade preformed strongly overnight while 2 year swap spreads continue to signal downside.
– Post-election ‘risk-on’ turns into ‘risk-off’
The risk rally following the US Presidential elections proved to be relatively short-lived, with US equity indices heading lower and USD gaining across the board. The JPY was one exception to that stronger USD trend as US Treasury yields slipped. At first glance, the ‘status quo’ outcome (Democrats retaining the Presidency and the Senate and Republicans retaining the House), did little to ease the market’s concerns over a political gridlock ahead of the looming US fiscal cliff. Our take is more constructive however. With Obama now a second-term President, we believe there is scope for Republicans to move to a more flexible stance than has been the case recently. In general, we see greater willingness from both parties to reach an agreement to avoid the fiscal cliff and a possible recession in 2013. Our economists also see scope for a broader compromise, including the potential lifting of the debt ceiling before the end of the year. Finally, the election outcome implies continuity in terms of monetary policy, with Vice Chair Yellen the likely frontrunner to replace Bernanke in 2014.
– EUR slips on Draghi…we prefer to express weakness via the crosses
EUR fell on comments from ECB President Draghi who said that inflation risks were very low and that the debt crisis was starting to affect Germany. These comments were however balanced by the reiteration that the ECB’s OMT program allows for unlimited bond market interventions. To some extent, Germany-focused comments appear to be consistent with Draghi’s recent German ‘charm offensive’ and should not be taken out of context. Acknowledging soft eurozone growth fundamentals (Germany’s September industrial output fell by a larger than expected 1.8% m/m), we see scope for EUR weakness on the crosses rather than against USD. EURGBP is a case in point and we believe that this cross can fall further, especially if UK data maintains its recent improvement. For the Thursday ECB policy meeting our economists do not believe the decision will yield any major news. The assessment of the economic situation is likely to be similar to last month’s given that the updated staff projections are not due until December. In the absence of a rate cut, a reiteration of the OMT commitment by Draghi should offer EUR some support, at least against USD. The sovereign fiscal outlook uncertainty continues as to when Spain requests formal assistance and whether this coincides with requests by Greece, Cyprus and Slovenia at the Eurogroup (November 12) meeting.
BNP Paribas