By Mike Burrowes and Kymberly Martin
NZD
The NZD clawed back its losses from Friday during the evening. NZD/USD was dragged higher as risk sentiment improved during the early evening, rallying from 0.8200 to above 0.8300. Over the week, NZD/USD ended basically unchanged, despite falling below 0.8000 early in the week.
The NZ trade-weighted index ground back to 71.50, after starting Friday evening around 71.00. NZD/EUR rallied to 0.5840 currently, from 0.5780. NZD/GBP is back above 0.5100, from a low of 0.5050 on Friday afternoon. NZD/JPY has surged back above 64.00, after starting the evening at 62.80.
NZD/AUD rallied from 0.7980 back to 0.8040. Interest rate differentials continue to provide support to the cross. The NZ-AU 3 year interest rate differential is currently -73bps, from -91bps at the beginning of the week.
However, in the near-term, we feel expectations of 50bps of rate cuts from the RBA at the next meeting are overdone. The potential reversing of this cut could push the cross back down to 0.7850 initially.
The concerns around global growth have seen expectations of rate hikes from the RBNZ scaled back. The OIS market now expects 50bps of hikes from the RBNZ over the next 12 months. However, in contrast the OIS market expects rate cuts from the other major central banks. An easing in global growth concerns would likely see NZ’s interest rate advantage widen further.
It is a very light data week locally, so expect the NZD to take its cues from offshore. The market will be scrutinising the RBA board minutes from their August interest rate decision on Tuesday. We expect the minutes to show the RBA is not considering cutting rates anytime soon, in contrast to current market pricing. Over the week, initial support on NZD/USD is seen around 0.8050 and resistance around 0.8550.
Majors
The USD ended marginally lower against the major currencies on Friday. Over the week, the USD index rose from 74.40 to 74.60.
Markets ended the week on a more positive note, with the S&P500 index and Euro Stoxx 50 index up 0.5% and 4.2% on Friday respectively. Over the week, the S&P500 index and Euro Stoxx index ended down only -1.7% and -2.8%. The VIX index (proxy for risk aversion) closed at 36.30, but still remains very elevated.
EUR/USD surged 1 cent higher to 1.4290 during the evening as Eurozone financial stocks posted strong gains. The gain in equities was largely driven by the short-selling ban imposed by several European countries on Friday morning. In addition, the Italian cabinet unanimously approved their austerity plan.
The data out in Europe was overshadowed by the rise in equity markets. The data in France disappointed across the board. GDP for Q1 was flat (0.3% expected) and CPI for July fell 0.5% m/m (-0.3% m/m expected). Eurozone industrial production for June was a shocking -0.7% m/m (0% expected).
The USD recouped some of its losses in the early hours of Saturday morning as US data weighed on risk sentiment. US consumer sentiment for August posted its worst outturn since 1980, suggesting the debt ceiling debate dented sentiment (54.9 vs 63.0 expected). The data saw EUR/USD fall from above 1.4280 back to 1.4240.
The CHF weakened again on Friday as investors are worried the Swiss National Bank could implement negative interest rates. While the SNB’s actions may have a short-term impact, an improvement in the US and Europe is needed to stem the CHF’s rise longer-term. The CHF weakened over 2% against the USD and EUR to 0.7780 and 1.1100 respectively.
Currency speculators cut their bets against the USD by more than half to their lowest since January (data from the CFTC). The value of the USD’s net short position dropped to USD11.6 bn in the week ended 9 August, from USD24.8 bn in the previous week. Speculators turned bearish on the EUR, with net short positions of USD 8.3 bn.
Looking to the week ahead, expect trading to remain volatile as the market frets about a slowdown in the US economy and the European debt crisis. On the data front, on Tuesday we have Eurozone GDP, UK CPI and US industrial production.
On Wednesday, the highlights will be the Bank of England minutes and Eurozone CPI. The data highlights round out on Thursday, with UK retail sales and US CPI. Several Fed members speak throughout the week.
Fixed Interest Markets
It was a day of consolidation in NZ interest rate markets on Friday. Later in the night, US 10-year yields inched lower to 2.25% though were still up from intra-week lows.
NZ swap yields rose by 2 to 4bps along the curve on Friday. This left yields lower on the week, but above their Monday lows, as risk aversion moderated slightly as the week progressed. The VIX index (a proxy for risk aversion) declined from a high of 48 at the start of the week to 36 on Friday.
Bond yields also consolidated on Friday, rising 1 to 2bps along the curve. Over the week, bond yields were down 10 to 12bps, dragged down by declining off-shore yields. Low bond yields contributed to weak demand at the DMO’s auction on Thursday. Only 25m bids were received for 100m of 15s offered. Slightly stronger demand was seen for 23s where 150m bids were received for 50m offered. The decline in bond yields relative to swap yields, over the week, saw 10-year EFP rise to 44bps.
On Friday night US 10-year bond yields inched down from 2.34% to 2.25%. US 10-year yields had started the week at 2.56%, declining as investors sought “safe haven” assets, in the backdrop of risk aversion. However, by the end of the week yields had bounced off mid-week lows of 2.03%. German 10-year bund yields also ended the week above their intra-week lows, at 2.33%.
In Europe, Spanish and Italian 10-year bond yields have retreated further to trade below 5% and CDS spreads remain below their highs. Tuesday will bring the latest of meetings between French and German officials to try and bring resolution in the ongoing European debt saga.
In NZ, the data releases this week will be of second tier relevance. However, today’s Performance of Service Index should be important in gauging if the services sector is maintaining the momentum seen in last week’s PMI. If off-shore issues begin to show any stabilisation, attention should return to the solid basis of the NZ economy.
We continue to believe that market expectations for RBNZ rate hikes in the coming year (now around 50bps) are too low and will see upward revision.
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See our interactive swap rates charts here and bond rate charts here.
Kymberly Martin and Mike Burrowes are part of the BNZ research team.
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