NZD
NZD/USD traded inside a one cent range overnight before drifting down to 0.8620 this morning.
There was a general tone of muted risk appetite overnight with European equities declining another 2.0% and commodities also under pressure. The S&P500 had a reversal overnight after some speculation the Fed will engage in a QE3 program to help boost the sluggish economic recovery. The S&P500 is currently up 0.5%.
The NZD responded to the general lacklustre tone in markets yesterday in the absence of any local data releases, easing lower relative to the USD. However, relative to the AUD trading was a lot choppier as the market responded to weak Australian retail sales numbers. The NZD/AUD has traded as low as 0.800 and high as 0.8070 in the past 24-hours, before trading around 0.8020 this morning.
The NZD lost ground versus a strong EUR and GBP overnight, that were boosted by positive surprises in their Services PMI releases. The NZD/EUR traded down to 0.6020 this morning, and the NZD/GBP to 0.5250.
Global risk appetite will continue to be a driver of the NZD today, along with today’s HLFS NZ employment report that we expect to be solid.
Majors
Risk sentiment remained muted overnight without significant further deterioration. Global PMI releases were relatively firm. European currencies outperformed, while “commodity-linked” currencies CAD, AUD and NZD declined over the past 24-hours.
The USD declined against a strong EUR and GBP overnight. The EUR was buoyed by its Services PMI data that came in just above expectation at 51.6 (51.4 expected) and June retail sales data that rose 0.9%m/m (0.5% expected).This saw the EUR/USD move up from 1.4200 to above 1.4300 this morning.
The GBP saw a similar surge higher after the release of its Services PMI at 55.4 (53.2 expected) that provided a rare positive surprise amongst recent UK data releases. The GBP/USD gapped higher from 1.6300 to 1.6350 before continuing on an uptrend to trade around 1.6420.
Against this backdrop the USD, that was already under pressure, gapped lower last evening to trade around 74.00 this morning. It showed little response to its own Services PMI that was slightly disappointing at 52.7 (53.5 expected), though still in expansion territory.
The CHF was the weakest performer over the past 24-hours losing 0.7% versus the USD after the SNB announced new monetary and liquidity measures to counter the strength of the CHF. The SNB stated the CHF was “massively overvalued” and with immediate effect would cut its target rate to as close to zero as possible, and also increase the supply of francs to market in coming days. The immediate effect on the CHF was short-lived as it maintains its “safe haven” appeal given ongoing risk aversion. The USD/CHF spiked from 0.7630 to 0.7780 before idling off to 0.7680 this morning.
The global backdrop of muted risk appetite and declining commodity prices, (WTI oil price -2%, CRB global commodity index -1.4%) saw “commodity-linked” currencies CAD, AUD, and NZD under pressure overnight.
The AUD drifted off to 1.0750 this morning. It also felt some selling pressure after yesterday’s June retail sales disappointed at -0.1%m/m (0.4% expected) emphasising the two-speed nature of the Australian economy.
In the day ahead, both the BoE and ECB announce rates, though are expected to remain on hold. German Factory Orders will also be released.
Fixed Interest Markets
NZ interest rate markets rallied aggressively yesterday, following the lead of their off-shore counterparts. The swap curve steepened.
NZ swap yields declined 6bps at the long end and as much as 13bps at the short end. Yields were following moves seen off-shore, as risk aversion spiked. Moves were also in sympathy with sharp declines in yields seen from Australian swap yields. OIS markets have reduced expectations for RBNZ rate hikes in the coming year from around 100bps to around 80bps.
The market appears to be factoring in current global uncertainties rather than responding to any developments locally, which have been fairly benign in recent days. 2-year swap yields ended the day at 3.55% and 10-year yields at 5.04% with the curve steepening to 149bps.
Moves in NZ bonds were more uniform across the curve. All bonds rallied strongly with the yield on 13s declining 13bps and yield on 21s by 15bps.The DMO has announced the auction of $250m of bonds today, distributed between 17s, 19s and 21s. We expect to see good demand, given the current environment.
The IBRD has announced the sale of $300m of kauri bonds, maturing Aug 2016. The 4.5% notes were priced to yield 72.3bps more than similar dated NZ government debt.
Australian swap yields also continued their recent precipitous decline. 3-year swap yields have now declined 37bps this week, as the market now prices around 75bps of RBA cuts in the coming year. By contrast, we expect the RBA to maintain a tightening bias given projections for futures inflation and growth. We believe these would make the RBA extremely uncomfortable with cutting.
Overnight, US and German 10-year yields consolidated around 2.60% and 2.40% respectively.
In the day ahead we have the NZ employment report that we expect to be solid. This evening both the BoE and ECB announce interest rates.
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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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