Currency Markets Hit By A Deluge of Risk Negative Developments; Kiwi Shaken !!!
Currencies have been hit with a deluge of risk negative developments over the past several hours and no currency has been hit harder than the New Zealand Dollar which has been crushed on the back of a devastating earthquake in Christchurch. The quake has resulted in many deaths, while several of the city’s buildings have been compromised and the local airport has been shut down. Our thoughts and prayers go out to those close to the disaster and we wish all of New Zealand a quick and healthy recovery.
From a price action standpoint, the break below 0.7500 is critical, with the market breaking to fresh yearly lows and opening the door for a more significant decline towards next key support which comes in by 0.7340 further down. We had already been projecting Kiwi weakness before the quake on a technical and fundamental basis (expectation for a narrowing of yield differentials), and unfortunately, this latest development should only exacerbate the situation. To add further fuel to the fire, a combination of elevated risk aversion on geopolitical fears, and some isolated downside pressures in the Euro have not helped matters.
The elevated geopolitical tensions have certainly been playing their part, with oil prices skyrocketing on Monday on heightened tensions in North Africa and the Middle East. Most recently, two Libyan planes landed in Malta in an effort to defect rather than follow orders to bomb protestors, while the Libyan ambassador to India has resigned and called for the UN to act to protect the Libyan people. Moreover, Libya’s mission to the UN has abandoned the regime and is calling for an international intervention to stop the genocide. Of course, the Iranians are taking full advantage of the chaos with wires reporting 2 Iranian war ships entering the Suez Canal and heading towards the Mediterranean.
Moving on, there have been some Eurozone specific factors that have been weighing on the Euro, with the larger than expected defeat of German PM Merkel in the state election fueling speculation that any positive consensus on sovereign debt will erode. Any change in sentiment towards policy which shifts to a focus on a broader national fiscal adjustment rather than on simply eliminating the tail risk, specifically from the beleaguered Eurozone economies, acts as a major weight on the Euro and opens the door for additional downside risks to the currency. The latest article from Weber which outlines a call for a more nationalized fiscal adjustment could therefore make waves if this now becomes the majority opinion in Germany.
Finally, the Yen has also managed to make headlines for its own specific merits, with the single currency trading lower on the day despite safe haven bids, after Moody’s came out and downgraded Japan’s Aa2 government rating outlook to negative. Technically, USD/JPY is attempting to put in a bullish outside day and could be getting set for an eventual break above critical topside resistance by 84.50 over the coming sessions. Fresh bids are seen on intraday dips below 83.00.
On the data front, the Australian Dollar which has already been weighed down by the negative risk environment, has found some additional offers on a lower NAB business confidence reading. Looking ahead, German GfK consumer confidence (5.8 expected) is due out at 7:00GMT, along with the Swiss trade balance, and Swiss UBS consumption indicator. UK public finances (-6.0B expected) and public sector net borrowing (-0.3B expected) then rounds things out for the European session at 9:30GMT. US equity futures are getting hit hard, while gold is also a good deal lower. Oil on the other hand remains well bid and consolidates its massive gains above $93.00.
By Forexsoup
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22nd February 2011, 09:59
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