The NZD was amongst the strongest performing currencies over the past 24 hours though it still lost ground relative to a broadly stronger USD. The NZD/USD trades around 0.8700 this morning.
The NZD/USD was boosted yesterday by a very strong NBNZ business survey. Business confidence pushed even higher to 47.6 in July, from 46.5 in June. The business activity indicator lifted to 43.7, up from an already hefty 38.7 in July. This is a long way above its average level of 25.6 and is indicative of annual economic growth of 5% plus. It serves to cement our long-held view that a solid economic recovery is underway despite all the recent trials and tribulations. The NZD/USD rose as high as 0.8760 following the data, before slipping back to 0.8700 overnight as global risk appetite deteriorated.
Against this backdrop, the NZD rose against a weak EUR, steadily rising from 0.6020 last evening to 0.6050 this morning. The NZD also crept higher against the GBP. The NZD/GBP traded around 0.5320 this morning, having made a new post-float high of 0.5340 overnight.
After a high-side surprise on Australian CPI yesterday (0.9%q/q vs. 0.7% expected) the NZD/AUD fell sharply from 0.7960 to below 0.7900. Overnight, the NZD/AUD bobbed sideways to trade around 0.7900 this morning not far above the fundamental “fair value” range of 0.7680 to 0.7880.
All eyes are now on today’s RBNZ meeting. Market pricing for RBNZ rate hikes has come a long way in the past few weeks, helping to boost the NZD. Markets now expect close to 100bps of rate hikes from the RBNZ in the coming year. We continue to expect 150bps with a first hike in September. If today’s RBNZ comments provide further evidence rate hikes are imminent, expect upward pressure on NZD/USD.
Majors
The AUD was the only major currency to outperform the USD over the past 24 hours. As risk appetite plummeted, the USD appeared to regain some of its “safe haven” status, along with the JPY and CHF that were also amongst the strongest performers. The AUD and NZD performed relatively well following positive domestic data. The EUR was amongst the weakest performers.
The debate around the US debt ceiling continues to rage as the clock keeps ticking toward the 2 August deadline. In addition, overnight saw a further downgrade of Greece’s sovereign rating by S&P (see interest rate section) The VIX index (a proxy for risk aversion) spiked to above 22, close to its mid-June peak. Equities fell with the Euro Stoxx 50 down 1.7% and S&P500 currently down 2.0%. Commodities fell with the WTI oil price down 2%.
In this backdrop, the USD regained some of its “safe haven” status despite some weak US data. US durable goods orders for June were -2.1% (0.3% expected). The USD index however moved up from 73.5 to 74.1, outperforming most majors.
The AUD was driven higher over the past 24 hours on its own fundamentals. The AUD/USD gapped higher yesterday afternoon after Q2 CPI surprised to the upside (see below). The currency dramatically broke above 1.1050 before returning to trade at 1.1000 this morning, a new 29 year high.
The EUR came under pressure with the return of focus to European sovereign debt issues, after US issues had taken the limelight in the past few days. German Finance Minister Schaeuble commented “It would be wrong to think the crisis of trust in the euro area can be conclusively ended in a single summit”. The EUR/USD declined from 1.4500 to 1.4350.
The GBP/USD gave up much of its previous day’s gains after a very weak CBI business optimism survey (-16 vs. 10 expected). The GBP/USD fell from 1.6420 to 1.6320.
In the day ahead, focus will continue on US and European debt developments. The Eurozone business climate indictor will be released this evening along with US pending home sales data.
Fixed Interest Markets
New Zealand swap yields opened lower yesterday before pushing higher after an extremely strong NBNZ business confidence survey. 2-year swap yields closed about 3bps higher at 3.67%, while 10-years swaps closed virtually unchanged at 5.27%. Bond markets showed a bit of volatility intra-day but closed almost unchanged.
The OIS market is now pricing close to 100bps of rate hikes from the RBNZ in the coming year. It is pricing around 60% chance of a 25bps rate hike in September. We do not expect the RBNZ to hike today, but expect clear comments to pave the way for rate hikes in the near future. We expect hikes to begin in September.
Across the Tasman, the Australian Q2 CPI number surprised to the upside yesterday at 0.9%q/q (0.7% expected). This led to a sharp and abrupt rise in Australian swap yields as the market reassessed its expectations for rate cuts in the coming year. The market reduced expectations for rate cuts from -40bps to -25bps. We do not expect rate cuts at all. 3-year swap yields spiked from 4.9% to 5.05%. Consequently, the NZ-AU 3-year swap spread moved from -0.95% to -1.04%.
Overnight, the twin headwinds of European and US debt problems continued to weigh on markets. Rating agency S&P further downgraded Greece’s sovereign rating to CC from CCC and assigned a “negative watch” outlook. Greek yields ticked up along with CDS spreads. Other peripheral yields also saw upward pressure, with Spanish and Italian yields moving up to 6.0% and 5.76% respectively.
In the backdrop of heightened risk aversion, German bund yields dribbled lower to 2.65% retesting recent lows. US 10-year yields continued to hover below 3%.
The key for NZ interest rate markets today is the RBNZ meeting. Although yields have moved substantially in recent weeks to price RBNZ rate hikes, comments that increase expectations for a September rate hike would see yields push higher. We expect curve flattening
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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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