By Mike Burrowes and Kymberly Martin
NZD
NZD/USD was the best performing currency over the past 24 hours, rising from around 0.8170 to 0.8250 currently. We note some decent demand for the NZD from Asian sovereign names overnight.
The NZD was supported by an improvement in risk appetite and hopes US Federal Reserve Chairman Bernanke will provide another round of support to the ailing US economy. Overnight, the S&P500 and Eur Stoxx 50 index rebounded 0.3% and 1.1% respectively. Our risk appetite index (scale 0-100%) still remains very low at 29.4%.
While the immediate concerns around the US economy and Eurozone debt crisis linger, we expect NZD/USD to remain in a 0.8000 to 0.8500 range. Beyond this, we continue to forecast NZD/USD moving back towards the post-float high by the end of September. To our mind, such a move would only require risk sentiment stabilising at more normal levels. Indeed, the recent global ructions have done little to change our core view of a strong domestic recovery and need for the RBNZ to hike rates more aggressively.
The strong NZD relative to the AUD, saw the cross move back into the bottom of the recent 0.7900 – 0.8100 range. We see further upside to the cross from here as the NZ-AU 3-year interest rate differential has moved in the NZD’s favour, currently -78bps from -85bps last week. Against a weak EUR, the NZD recovered back to 0.5740 from 0.5690. NZD/GBP popped back above 0.5000, from 0.4950 yesterday.
Looking to the day ahead, first up we have the RBNZ survey of inflation expectations. This will be closely watched given the previous outturn was at the top of the central bank’s target inflation band. Expect risk sentiment to take its cue from the Chinese HSBC PMI manufacturing release and a speech by RBA deputy governor Battellino.
Majors
The USD dribbled lower against most of the major currencies, led by a modest recovery in equity markets and risk sentiment. The “safe haven” CHF and JPY underperformed across the board. Despite the recovery overnight, the mood remains fragile due to lingering worries about the US economy and Eurozone debt saga.
Concerns EU leaders are moving too slowly to address the sovereign debt saga weighed on the EUR overnight. The latest concerns were sparked by German Chancellor Merkel, noting she would not support the issuance of eurobonds as it would not solve the current debt crisis. EUR/USD is broadly unchanged at 1.4370, after reaching an overnight high of 1.4430.
The market is waiting with bated breath for US Federal Reserve Chairman Bernanke’s speech at Jackson Hole on Friday evening. With the recent market turmoil and weaker US growth, speculation is mounting Bernanke could hint at further action to support growth. We suspect Bernanke will stop short of announcing another round of quantitative easing, instead noting the Fed can change the size and composition of its balance sheet.
The hopes of further stimulus from the Fed has put downward pressure on the USD and helped to lift commodity sensitive currencies overnight. Quantitative easing by the Fed increases the amount of USDs, thus pushing down the currency and US interest rates along the curve. That encourages investors to seek higher returns in stocks or currencies that carry higher rates. AUD/USD surged from 1.0390 to 1.0470 during the early evening, but has partially reversed these gains in the early hours of this morning to be trading near 1.0420.
The CHF was the worst performing currency over the past 24 hours. The weakness in the CHF occurred after the Swiss National Bank supposedly intervened in the forward market, although this is unconfirmed at this stage. This action is aimed at reducing the addition return investors can currently earn in the USD/CHF FX swap by selling CHF forward, buying spot. Overnight, USD/CHF weakened from 0.7860 to just shy of 0.7900 currently.
The Japanese Finance Minister, Noda, gave his strongest signal on intervention yesterday. He noted Japan will take decisive action against any speculative moves in the JPY. The comments briefly caught the market off-guard, with USD/JPY spiking from 76.60 to 77.20 during our day. Overnight USD/JPY has chopped around 76.70
We expect the market to remain more range bound as the market awaits Bernanke’s speech on Friday evening at Jackson Hole. Tonight, in the Eurozone we have PMI manufacturing and services, the ZEW survey and consumer confidence. In the UK, the only highlight is a speech by the Bank of England’s Weale. In the US, the US Richmond manufacturing index will be closely watched for further evidence of the US slowdown.
Fixed Interest Markets
It was a quiet day of consolidation in NZ and global interest rate markets, yesterday.
NZ swap yields opened lower, but closed almost unchanged. 2-year swap yields continue to trade around 3.27%, which is the lower end of their trading range of the past few months.10-year yields have treaded water around 4.79%.
Bond yields have also been fairly subdued with 10-year yields continuing to trade around March 2009 lows of 4.42%. As Australian 10-year bond yields inched higher yesterday, the AU-NZ 10-year bond spread narrowed to -15bps.
US and German 10-year yields crept higher overnight, in the backdrop of a tentative improvement in risk appetite. US and German 10-year yields respectively moved up from 2.05% to 2.10% and from 2.08% to 2.10%.
The market appears to be in “wait and see” mode leading up to the Jackson Hole meeting of central bankers on Friday. Some analysts suggest the current low levels of US 10-year yields already prices in US$500 to US$600 billion of further asset purchases by the Fed. However, even if Bernanke disappoints on expectations of such action, 10-year yields are unlikely to rise meaningfully, as they continue to discount subdued medium-term US growth.
Locally, today, the release of the RBNZ’s 2 year inflation expectations data will be important. The Q2 reading showed expectations at a 20 year high of 3.0%. While some pull-back is likely, we think expectations will remain uncomfortably high. In previous statements, the RBNZ has expressed its discomfort if inflation expectations do not moderate. A high-side reading should therefore remind the market that the RBNZ can not remain on hold, at historically low rates, indefinitely.
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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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