The NZD/USD came under pressure overnight as markets continued to fret about the European debt crisis. The NZD was among the worst performing currencies, taking its cues from sharp declines in industrial commodity prices and global equity markets. Overall NZD/USD lost around � cents to 0.7510 currently.

Trading in the NZD against the EUR was choppy overnight. NZD/EUR jumped to a high around 0.5840 early this morning, but is now unchanged at 0.5780. The NZD/GBP continued to decline, falling from 0.4900 to 0.4860 currently.

The NZD/AUD showed some volatility, trading within a 0.7520 to 0.7580 range. For now, large option structures are capping any moves higher in the cross. Looking to the year ahead, we expect the cross to gradually appreciate to around 0.8500 by September next year.

Looking to the day ahead, this morning we have the November update of the NZ Business PMI (previous 46.5). Across the ditch we get consumer inflation expectations and vehicle sales. On the day, initial support for NZD/USD is eyed at 0.7490 and resistance at 0.7580.

Majors

Risk aversion continued to climb overnight as investors fretted about the lack of a solution to the European debt crisis. This saw investors look to the safety of the USD and JPY and shun the risk/commodity sensitive currencies.

The ongoing concerns over the European debt crisis has continued to weigh on equity markets, with the S&P500 index and Euro Stoxx 50 index shedding 0.9% and 2.5% respectively. Our risk appetite index (scale 0 - 100%) dropped to 36.9% from 39.5%. Growth sensitive commodities were battered overnight, with copper and WTI oil plunging 5.0% and 4.3% respectively.

Markets remain very unimpressed with the fiscal integration plan announced at the EU summit on Friday. The lack of a credible solution to stem the crisis in the short-term, saw EUR/USD plunge to an overnight low around 1.2950. The declines in the EUR started after Italy paid a Euro era record of 6.47% on its new five-year bonds. The previous record was 6.30% in November. Weaker-than-expected Eurozone industrial production for October (1.3% vs. 2.1%y/y expected), and comments from Moody's about the debt profile of banks in 2012, added to the dour sentiment.

Further weighing on sentiment was rumours a French sovereign rating downgrade was imminent. However, S&P later rebuffed these rumours, noting it "has not warned France about possible downgrade". The comments from S&P helped the EUR/USD recover to around 1.3000 currently.

As usual, in times of heightened risk aversion, investors have sought the safety of the USD and JPY. This has seen the USD index rise 0.2% to 80.50. The JPY held reasonably steady against the USD at 78.00.

The GBP ended only slightly lower against the USD, currently trading around 1.5480. Helping to support the GBP was better-than-expected UK jobless claims for November (3k vs. 13.7k expected). Highlighting the broad-based weakness in the EUR, the EUR/GBP briefly hit a 10-month low, at 0.8370.

The risk sensitive AUD and NOK were among the weakest performing currencies against the USD. The AUD/USD has shed around 1 cent to 0.9920 currently. The USD/NOK gained 0.9% to 6.00. Adding to the weakness in the NOK, the Norwegian central bank lowered its policy rate by 50bps to 1.75%. Prior to the decision, markets were pricing around a 25% chance of a 25bp cut.

Looking to the day ahead, the market will be looking to PMI manufacturing data for the Eurozone to get a better guide on whether manufacturing activity continues to contract. A further decline in Eurozone CPI (released tonight) will give the ECB more scope to ease monetary policy. In the UK, we have retails sales due for release. In the US, we have the empire manufacturing survey, Philadelphia Federal business survey, industrial production and PPI.

Fixed Interest

NZ swap yields slid slightly lower yesterday, while bond yields were unchanged. Overnight, offshore "safe haven" yields subsided as risk appetite waned.

Yesterday, swap yields closed down another 2-4bps across the curve. They opened lower and failed to remake the ground on the day. 2-year yields closed at 2.71%. The short-end continues to price around 20% chance of a rate cut from the RBNZ at the next meeting. We do not expect cuts. 5-year swap yields continue to languish at all time lows, around 3.28%.

Bond yields mostly treaded water yesterday, closing unchanged. NZ 10-year yields trade at 3.87%. In the past couple of weeks, NZ 10-year yields have declined relative to their AU counterparts. They now trade at similar levels. However, NZ swap yields have declined more than bond yields (10-year EFP has narrowed to 20bps), so the immediate direction for NZ long yields from here, seems unclear. Over the medium-term we continue to see long-end bonds as too expensive and expect yields to rise.

The DMO announced a relatively light auction for today, with just 50m of 19s and 50m of 23s on offer. The DMO is likely responding to the modest demand at recent auctions.

Yesterday morning the US FOMC meeting was relatively low key. The Federal Reserve noted Eurozone risks but improving US economic performance. It did not announce any further easing measures, preferring to await developments in the new year.

US 10-year yields fell steadily overnight, from just below 2.00% to 1.94%. German equivalents fell to 1.92% as global risk appetite declined further. Italy sold ?3b of 5-year bonds at 6.47%, its highest yields since 1997. The bid-to-cover ratio was 1.42x. Familiar rumours swirled overnight of a potential downgrade to France's sovereign rating. French 5-year CDS spreads (the market price of potential default) are surging toward previous highs.

Today we get the NZ PMI. While it dropped into contraction territory last month, at 46.5, on balance we expect some recovery this month. Tonight, we get the Eurozone PMI, CPI and employment data for the latest pulse check on Eurozone.