The NZD/USD is trading at virtually the same level as 24 hours ago. In the interim, it fell on the London open to around 0.8620 and touched new highs above 0.8670 early this morning. It is trading around 0.8650 currently.
Overnight, the global backdrop was one of a modest pullback in risk appetite. Moody’s further downgraded Greece’s debt rating and the laborious negotiations over the debt ceiling continue in the US.
The NZD lost some ground relative to the AUD overnight. Sharp moves higher on the cross in recent weeks have been driven by the contrasting interest rate outlooks on either side of the Tasman. Markets now price almost 100bps of rate hikes from the RBNZ in the coming year while still pricing cuts from the RBA.
The market is now taking a breather ahead of two important events that will affect respective interest rate outlooks this week: tomorrow's Australian Q2 CPI release and Thursday’s RBNZ meeting. The NZD/AUD currently trades around 0.7980, not far above the fundamental “fair value” range of 0.7680 to 0.7880.
The NZD showed a bit of volatility in trading relative to the EUR and GBP overnight but appears to be consolidating following recent strong gains. The NZD/EUR is currently trading around 0.6020 and NZD/GBP at 0.5310.
While the NZD/USD remains well supported, our “fair value” model continues to suggest recent moves higher are ahead of ‘fundamentals’. This suggests the risks are skewed to a small pullback over the coming months.
In the day ahead the NZD may find some direction from the release of the NZ trade balance for June. This evening US data releases (see below) and debt negotiations have the potential to impact risk appetite, and by implication the NZD.
Majors
It was a relatively subdued night for currencies. The USD declined a little versus most majors with the exception of JPY and CHF. A slight decline in risk appetite saw the CHF rise 1.7% relative to the USD over the past 24 hours.
With no major data releases the market’s general sentiment was undermined by the lack of a resolution in Washington, in the US debt ceiling negotiations. In the prevailing uncertainty, our risk appetite index (scale 0-100%) ticked down to 63%, commodities eased and equities declined.
The Eurostoxx 50 fell 1% and the S&P500 is currently down around 0.4%. This is despite ongoing strength in the US Q2 earnings reporting season where 80% of companies have surprised positively.
The USD index eased from 74.20 to 74.00 in the early hours of this morning. The key beneficiary of muted risk appetite was the CHF. It rose to an all time high relative to the USD of 0.8025. Similarly, gold made new all-time highs at U$1613 per ounce.
The EUR/USD bobbed sideways overnight between 1.4340 and 1.440, currently trading around 1.4380. Similarly the GBP/USD showed little momentum overnight. It lost a bit of ground to trade around 1.6300 after the release of further weak UK housing data that showed house prices declined 3.9%y/y in July.
The AUD and NZD both found a bit of upward momentum overnight. The market is still pricing more than 40bps of rate cuts from the RBA over the coming year. A high-side reading on Wednesday’s Q2 CPI (0.7%q/q expected) could see the market revisit these expectations, potentially boosting the AUD/USD near-term. It currently trades around 1.0850.
Today, RBA Governor Stevens gives a speech in Sydney. This evening, UK 2Q GDP will be released along with German consumer confidence. US data releases tonight are consumer confidence, Richmond Fed manufacturing index and new home sales. Elsewhere, all eyes will be on the tortuous process of negotiations in Washington.
Fixed Interest Markets
It was a quiet day in NZ markets with a bit of profit-taking after the significant recent sell-off. Yields were about 2bps lower across the curves.
2-year swap yields slipped 2bps from recent highs to close at 3.67% while 10-year yields closed at 5.32%. Similar moves were seen in bond markets with the yield on 13s and 21s closing at 3.41% and 5.09% respectively.10-year swap bond spreads remain around 23bps.
Overnight, Moody’s has cut Greece’s credit rating by 3 notched to Ca from Caa1.They stated that the latest EU support proposal will result in substantial losses for bond holders and this needs to be reflected in the rating. This brings Moody’s rating closer to those of S&P and Fitch.
‘Safe haven’ demand for German bunds drove 10-year yields from 2.82% to 2.76%. Italian and Spanish spreads to bunds widened, with 10-year yields rising from 5.77% to 6.03% and from 5.40% to 5.66% respectively. US 10-year yields showed substantial volatility overnight, but are now trading at familiar levels around 3.0%.
In the day ahead NZ interest rates will likely continue to consolidate ahead of Thursday’s RBNZ meeting.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes and Kymberly Martin are part of the BNZ research team.
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