NZD
The NZD/USD showed limited reaction to yesterday’s RBNZ statement. Despite some volatility overnight, it is now trading at similar levels to 24 hours ago, around 0.8690.
The RBNZ left rates unchanged at 2.50% but prepared the market for a 50bps rate hike in September, saying “the Bank sees little need for the March 2011 ‘insurance’ cut to remain in place much longer”. It however generated some ambiguity about the rate path thereafter, referencing the strong NZD and saying “if this persists it is likely to reduce the need for further OCR increases in the short term”.
The market reaction was much stronger in interest rate markets with a strong rise in short-term yields. We now expect the RBNZ to raise rates by 50bps in September (25bps previously), though our medium-term trajectory remains largely intact. We still expect the OCR to peak at 5.0% at the end of 2012.
The NZD ground higher relative to a weak EUR overnight to trade around 0.6080 this morning. The NZD/GBP touched a new post-float high above 0.5350 overnight before returning to trade around 0.5320 this morning.
Relative to the AUD, the NZD inched up to trade at 0.7910 this morning. The rise in NZ short-end swap rates saw NZ-AU 3-year swap spreads become less negative, moving from -105bps to -95bps, helping to underpin the NZD on this cross. We expect the RBA to remain on hold at next week’s meeting but present a more hawkish statement that will force the market to reverse expectations for rate cuts in the coming year. This should provide a near-term boost to the AUD relative to the NZD. Longer term, we continue to expect a gradual appreciation of the NZD/AUD.
In the day ahead, NZ building permits and household credit data will be released, though neither should significantly impact the NZD. Elsewhere general risk appetite will continue to be driven by developments in Washington.
Majors
Markets were in something of a holding pattern overnight as they await some concrete news in the US debt ceiling debate. The USD index inched higher overnight against weakness in European currencies.
Risk appetite remained somewhat muted overnight (our risk appetite index (scale 0-100%) held at 54%, equities were flat and the CRB global commodity index fell 0.5%.
The US debt ceiling debate continued to rage, without resolution, and there was talk of the US Treasury having a contingency plan if agreement could not be met by next Tuesday’s deadline. US data showed the consumer confidence index at -46.8 (-44.9 expected). A rare bright spot was seen in US pending home sales data that rose 17.3% in June (14.7% expected). However the data was relatively neutral for USD which was driven higher on the back of EUR weakness. The USD index inched higher from 74.100 to 74.200.
The EUR fell last evening after data showed that Eurozone business confidence fell sharply in July. The Business Climate Indicator fell from 0.95 to 0.45, its lowest level since June 2010. Declines were much larger than expected reflected falling export orders. The decline suggests that growth will slow further in Q3. The EUR fell from highs of around 1.4400 to 1.4320 this morning.
The GBP was also dragged down by the slump in the EUR and also by a further disappointing UK data point. The CBI retail sales volume data for July came in at -5 (2 expected). The GBP plunged from 1.6360 to 1.6300 last evening, before clawing its way back to 1.6340 this morning.
In the day ahead Japan will publish industrial production data that will shed some light on how this critical economy is rebounding from the March earthquake. This evening, we get Eurozone CPI data along with US Q2 GDP, Chicago PMI and University of Michigan Consumer Confidence.
Fixed Interest Markets
New Zealand short-end yields rose sharply and curves flattened significantly yesterday, following the RBNZ statement.
The RBNZ statement forced the market to reprice rate hikes. It had the effect of front-loading rate expectations with the market now pricing around 35bps of hikes at the September meeting. We now expect the RBNZ to hike rates by 50bps at that meeting.
3-month bank bills moved higher by 9bps to 2.85%. 2-year swap yields closed 9bps higher at 3.78%, almost back to levels they were at immediately prior to the February 22 Christchurch earthquake. 10-year swap rates declined 5pbs on the day resulting in a flattening of the 2s-10s curve to146bps.
Similar dynamics were seen in bond markets. The yield on 13s rose 7bps to 3.46%, while the yield on 21s declined 5bps to 5.02%. The DMO announced a 250m tender for today spread across 15s, 17s and 21s.
Overnight US 10-year yields continued to bob about just below 3%. With only days to go, the US debt ceiling debate remains in deadlock. In Europe, “safe haven” German 10-year bund yields made new lows at 2.63%. Italy sold €2.7b of 10-year bonds at auction but paid a yield of 5.77% compared to 4.94% paid at the previous auction a month ago. Spanish 10-year yields also ticked up in sympathy to 6.03%.
Despite the meaningful rise in NZ short-end yields seen in recent weeks, they continue to trade below “fair value” which we see at 4.25% and 4.50% for 2 and 3-year swap yields respectively. We therefore sill see value in fixing interest rate protection on a 2-4 year time horizon.
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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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